One of the problems I have with discussions by the IMF and the World Bank – and indeed by most economists – about China's economic prospects is that while by now nearly everyone agrees that Chinese growth includes many years...
of "inflated" – or "low quality" – growth, driven by wasted investment in non-productive property and infrastructure, there seems to be no recognition of the future cost of this inflated growth.
The conclusion is always that if Beijing implements the right reforms, while growth will slow a little, it will be high-quality and sustainable. This seems to assume that there will be no adverse consequence or difficult adjustment costs for growth in the future.
But if there is no rising cost in the future for all the bad investment in the past, then why bother reforming? The existing growth model generates substantial increases in economic activity, lots of jobs, and rising GDP. Why not keep it up forever?
It must be because the cumulative impact of many years of inflated growth will be negative growth in the future as this accumulation is amortized. In other words it must be because more inflated growth today means less growth tomorrow.
And that seems to be what the historical precedents suggest. In every previous case in modern history of an investment-driven growth "miracle", it seems that the longer the "inflated" stage, during which debt grows faster than GDP, the more difficult...
the subsequent adjustment to a more sustainable model in which the previous imbalances are reversed, whether the adjustment is in the form of a crisis (e.g. Brazil 1983), a lost decade of very low growth (Japan 1990) or both.
The point is that if the current growth model doesn't create substantial economic costs in the future, then there probably is no point in reforming it, and certainly no urgency. If it does, our discussion of future expectations should include some assessment of these costs.
It won't be easy, but perhaps we can start by trying to estimate the cumulative impact of many years of "inflated" growth. After all if it is inflated, doesn't that mean GDP is overstated relative to where it would have been without this inflated growth?

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More from @michaelxpettis

21 Nov
I read the very-interesting McKinsey report to which this article refers. Much of the world's "wealth", as McKinsey measures it, consists of the value of real estate, and given China's real estate bubble, which has driven its value...
news.yahoo.com/report-china-n… via @YahooNews
to more than twice that of the US and more than three times that of Europe, it perhaps isn't surprising that Chinese "wealth" now exceeds that of any other country.
Perhaps it will come as no surprise that the last time a country's total wealth exceeded that of the US was in Japan around 1990. It's share of global GDP at the time was roughly the same as China's today, and it was experiencing an even greater real estate bubble.
Read 6 tweets
21 Nov
I am not an expert on the French economy, Rémi, but I don't think France has been running persistent deficits for the past 10-15 years because of its US-style role in absorbing excess foreign savings. I think that is more of a problem for the Anglophone financial systems.
I think the reason for its persistent deficits is its refusal to play the German game of increasing international competitiveness by lowering wages relative to productivity, perhaps because it is politically too difficult for France to do so.
As I see it, Germany (along with other persistent surplus countries) is competitive internationally, and so runs surpluses, mainly because its workers are paid less relative to their production than the workers of its trade partners (including most of Europe).
Read 7 tweets
19 Nov
In this very interesting paper @Furno_Francesco compares the Kennedy corporate tax cuts in the early 1960s with the recent Trump corporate tax cuts, and finds that the former stimulated output roughly four times more than the latter.

Put differently, the Kennedy tax cuts seem to have increased business investment while the Trump tax cuts were mostly passed on to shareholders which, as Atif Mian, Ludwig Straub and Amir Sufi have explained elsewhere, was likely in turn to lead to higher household debt.
Furno explains that “A large part of this difference can be attributed to differences in pre-reform tax depreciation policy.”
Read 19 tweets
18 Nov
@gonglei89 1/4
The growth in the debt-to-GDP ratio did slow after 2015, partly because the regulators were able to squeeze out especially egregious forms of debt creation and partly because stricter regulations resulted in some debt creation moving off the balance sheet.
@gonglei89 2/4
Beijing however did not get debt under control, or even come close. After 2015 (even excluding 2020), official measures of debt continued to grow more than 1.2 times the GDP growth rate.
@gonglei89 3/4
Given how high the debt ratio has reached by now, this means that the increase in debt each year (still excluding 2020) is the equivalent of more than an astonishing 25% of that year's GDP (or 31% if we use your numbers rather than the PBoC numbers).
Read 4 tweets
17 Nov
In May 2016 the SCMP wrote excitedly about a major new policy piece in the People's Daily by an "authoritative" figure (which in PD-speak means someone extremely senior).
scmp.com/news/china/eco… via @scmpnews
"A People’s Daily article published yesterday," it said, "showed that China’s leadership is trying to make a grand shift in the nation’s economic policies in a bid to say goodbye to debt ­fuelled growth. In a sign of distaste for the credit-pumped growth in the past...
couple of months, the Communist Party mouthpiece cited an unidentified 'authoritative' figure as saying that boosting growth by increasing leverage was like 'growing a tree in the air', and that a high leverage ratio could lead to a financial crisis."
Read 7 tweets
16 Nov
There are two very different types of “wasted” infrastructure spending by the government, and each has a different impact on the overall economy. One kind of waste consists of spending $110 of resources and labor to produce...

wsj.com/articles/who-w… via @WSJOpinion
something that raises economic productivity by $100. In that case the country is poorer overall by $10.

Another very different kind of waste consists of spending $90 of resources and labor and $20 in bureaucratic costs (including graft) to produce something...
that raises economic productivity by $100. In that case the country is still richer by $10, but there has also been a $20 transfer within the country from one sector of the economy to another.
Read 6 tweets

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