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Michael Pettis Profile picture
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Feb 13 • 4 tweets • 1 min read
1/4
 The late stages of investment bubbles – usually characterized by surging debt and soaring real estate prices – always seem to be accompanied by an explosion in debt-related transactions that turn out later to have been, at best, questionable.
caixinglobal.com/2022-02-11/bil…
2/4
 This seems to have happening quite a lot in China. According to Caixin, for example, Cedar WMPs were sold through a mishmash of online and offline distribution channels, and included a variety of questionable underlying assets.
3/4
 Caixin quotes one investor as saying: "Many investors bought whatever their sales managers sold. Many can’t tell whether what they bought were trust products, privately offered products or debt financing products backed by accounts receivable.”
4/4
 I suspect their sales managers didn't know either – when liquidity is easily available, everything gets rolled over anyway. Those who are familiar with the history of bubbles, for example Japan in the 1980s, or the US pre-GFC, will find all this painfully familiar.

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More from @michaelxpettis

Michael Pettis Profile picture
Feb 13
1/6
 Pretty worrying article. It seems that the impact of the property-sector crisis, including through the non-payment of debt owed to small suppliers, was brutal last year on medium-sized enterprises, which account for over 80% of all jobs in China.

scmp.com/economy/china-…
2/6
 According to a study by Ant Research Institute and Peking University, MSEs saw operating income in the fourth quarter of last year drop to just 30.6 per cent of what it had been during the same period in 2019, on average.
3/6
 This seems a pretty astonishing number to me, and it followed a terrible third quarter, when MSEs earned 36.1 per cent of what they made in the third quarter of 2019. This was why average hiring in 2021 Q4 was down more than 40% from Q2.
Read 6 tweets
Michael Pettis Profile picture
Feb 11
1/7
 This is a case of incremental thinking, when trade only makes sense systemically: "Some economists have pointed out that Biden could have done more to ease inflation by cancelling tariffs on Chinese goods introduced by his predecessor Donald Trump."
ft.com/content/a13504…
2/7
 I disagree. Although I agree we should drop the tariffs, that's because the tariffs had no impact on overall trade imbalances. All they did was rearrange US bilateral deficits and Chinese bilateral surpluses without affecting either country's domestic imbalances.
3/7
 But that's also why dropping them will have no impact on inflation. I think that becomes obvious when you recognize that external imbalances are always the consequences of domestic imbalances.
carnegieendowment.org/chinafinancial…
Read 7 tweets
Michael Pettis Profile picture
Feb 11
1/7
 Very interesting and very timely book, although I'm not sure it has a sufficient explanation of the costs of debt.

On China: "The world’s second largest economy is in many ways a poster child of the dangers of credit booms gone bust."
voxeu.org/content/debt-e…
2/7
 Although "barring major policy mistakes, there are convincing arguments why a ‘hot’ crisis can be avoided. The Chinese government remains in firm control of the financial sector and has ample fiscal resources to deal with any major fallout."
3/7
 I think that's right: a crisis was always very unlikely, but, they continue, "the economic effects of a waning credit impulse, financial deleveraging and a resetting of expectations will likely have very real macroeconomic effects on the Chinese economy."
Read 7 tweets
Michael Pettis Profile picture
Feb 10
1/7
 "While Finance Minister Nirmala Sitharaman is betting infrastructure spending can have a multiplier effect on job creation and drive overall prosperity, the reality is it will take time for benefits to trickle down to those who need it most."
scmp.com/week-asia/poli…
2/7
 Unfortunately that's the way this growth model works. In a country that is severely under-invested, like India, one of the main growth constraints is the unavailability of domestic savings to fund badly-needed investment. In that case policymakers must boost savings.
3/7
 One way is to welcome foreign capital and to ensure that this capital is directed mainly to investment, and not towards funding increased consumption. This requires capital controls to direct investment and to protect the Indian economy from speculative inflows and outflows.
Read 7 tweets
Michael Pettis Profile picture
Feb 10
1/8
 This seems like a pretty important study on the decline of manufacturing in the US: "The loss of U.S. manufacturing," the authors argue, "is not due to some inexorable shift to a post-industrial economy."
@ITIFdc itif.org/publications/2…
2/8
 Instead, "it is due to a failure of U.S. policies (for example, underinvestment in manufacturing technology support policies and a corporate tax rate that is increasingly uncompetitive) and the expansion of other nations’ mercantilist policies."
3/8
 One of the lines in the report that struck me was this one: "While manufacturing has declined as a share of GDP in some nations (notably Canada, Italy, Spain, the United Kingdom, and the United States), it is stable or growing in...
Read 8 tweets
Michael Pettis Profile picture
Feb 10
1/4
 Even Chinese newspapers are now warning in editorials about the extent of wasted infrastructure spending in China, suggesting that there is a consensus among economic policymakers in Beijing, although perhaps not among local politicians.
yicaiglobal.com/news/opinion-e…
2/4
 According to Yicai: "Poor-efficiency investment has not been uncommon in past years, wasting resources to some extent. Thus, local governments should not blindly boost their investments, expecting better outcomes."
3/4
 The editors also acknowledge that the purpose of increasing infrastructure investment is to "help stabilize growth". China's problem is that it has relied too much for growth on non-productive activity, and this must stop.
Read 4 tweets

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