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Michael Pettis Profile picture
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Feb 19 • 4 tweets • 1 min read
1/4
 China's trade surplus is caused by distortions in its distribution of domestic income, with households retaining too low a share and local governments too high a share. No trade "tools" the US can yield will change that.
reuters.com/business/ustr-…
2/4
 More importantly, US deficits are driven by the US role in absorbing excess global savings. Again, no trade "tools" can change that unless they were substantial and were imposed on all trade partners. Even matching China's effective manufacturing subsidies won't change that.
3/4
 Trying to resolve trade imbalances as if trade and capital flows still operated as they did in the 19th or early 20th centuries hasn't worked in the past four decades. It won't work in the future either. We need a very different trade strategy.
4/4
 We should be thinking about creating a new kind of trade agreement in which countries with persistent trade surpluses are required to take reflationary steps and the disruptive effects of unfettered capital flows are restrained.

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More from @michaelxpettis

Michael Pettis Profile picture
Feb 17
1/4
 This is an interesting experiment that may benefit Zhejiang in the longer run by giving it a larger share of China's educated young workers, but as usual it is a supply-side measure rather than the demand-side support that it really needs.
reuters.com/markets/rates-…
2/4
 I suspect that most young college grads that move to Zhejiang to take advantage of these loans are likely to build consumer-related small businesses, in which case they will be constrained, like the rest of the private-sector, by China's very low consumption share of GDP.
3/4
 Zhejiang is supposed to be taking the lead within China in implementing policies to reduce income disparity, and this loan program is being promoted – as is nearly every recent policy in China – as somehow furthering "common prosperity", but if Beijing...
Read 4 tweets
Michael Pettis Profile picture
Feb 17
1/6
 An examination of provincial growth plans for 2022 suggests that we are going to see a renewed surge in infrastructure spending, according to Caixin. This comes after a year in which local governments were able to cut back.
caixinglobal.com/2022-02-16/in-…
2/6
 "Of the around 20 provincial-level regions that have announced growth targets for fixed-asset investment," Caixin says, "which includes government-driven infrastructure spending, almost all set targets higher than their GDP growth targets."
3/6
 This isn't a surprise. Last year was the only year in which a surge in consumption, mainly a reversal of the sharp contraction the previous year, was likely to lead GDP growth, and this was reinforced by soaring exports and strong private-sector investment.
Read 6 tweets
Michael Pettis Profile picture
Feb 16
1/5
 According to a former Chinese regulator, "Fed tightening is expected to reduce foreign capital inflows into China, shrinking the country's trade surplus and thus helping stabilise the yuan."
reuters.com/markets/curren…
2/5
 I think he's partly right. The PBoC has been worried about excessive inflows through the trade and financial accounts, and a narrower spread US-China interest rate spread should partially relieve the pressure on the financial account (not, however, the trade account).
3/5
 Already in January net foreign purchases of Chinese government bonds were RMB 70 billion, versus RMB 79 billion in December and RMB 80 billion yuan in November. Total foreign holdings of Chinese bonds last month added up to RMB 4.07 trillion.
Read 5 tweets
Michael Pettis Profile picture
Feb 15
1/6
 The construction of subsidized rental housing will be a priority of the current 5 Year Plan, but while some argue that this could help stabilize the real estate industry, the current estimates for construction seem too small to make a huge impact.
caixinglobal.com/2022-02-15/in-…
2/6
 As Caixin puts it: "The effect of subsidized rental housing in counterbalancing the real estate investment slump should not be overestimated, and the slowing of real estate investment growth is irreversible."
3/6
 The good news is that subsidized housing is one of the most efficient ways to transfer income from local governments to the poor (assuming it is done with reasonable efficiency).
Read 6 tweets
Michael Pettis Profile picture
Feb 13
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.”
Read 4 tweets
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

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