Michael Pettis Profile picture
Dec 8 8 tweets 2 min read Twitter logo Read on Twitter
Xinhua: "China's manufacturing sector topped the world in size for 13 consecutive years in 2022, with the sector's added value contributing to over 30 percent of the world's total."

This may seem at first like a good thing, but while Chinese...
manufacturing accounts for over 31% of the world's total, Chinese consumption accounts for only 13% of global consumption. Globally every dollar of manufacturing is supported by $4.7 of consumption (and by $6.1 in the world ex-China). In China it is supported by only $1.9.
This means that if China is to keep growing its share of global GDP, there are literally only two ways it can do so. One way is to redirect resources from manufacturing to consumption, so that Chinese supply growth is balanced by growth in domestic demand.
The other is for other countries to agree to accommodate a faster expansion in Chinese manufacturing than in Chinese demand by reducing their own manufacturing shares of GDP.

The former doesn't seem to be happening. The recent decline in the GDP share of property...
investment hasn't been matched by an equivalent rise in the GDP share of consumption but rather by a rise in the GDP share of manufacturing investment. This suggests that if anything, the imbalance between manufacturing and consumption in China is likely to rise.
As for the latter, if major economies like the US, the EU, India and Japan expect to implement policies to protect or expand their own manufacturing shares, the world will not be able to accommodate further unbalanced growth in the Chinese share of global GDP.
The result will be a worsening fight over trade, which will be especially painful for countries with weak domestic demand. As we saw in the 1930s, beggar-thy-neighbor trade wars are especially painful for surplus countries, if less so for deficit countries.
After years of predicting worsening trade relations, It may seem alarmist for me to say we are further away than ever from a resolution, but the arithmetic is pretty simple and hard to refute. I show this in my most recent piece published by Carnegie.


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More from @michaelxpettis

Dec 9
Today's inflation data for November seem to reinforce this week's trade data that suggested that domestic demand is struggling to recover. CPI prices were down 0.5% both year on year and month on month, in either case more than the market expected.

This was mostly driven by food, down 4.2% year on year. Core inflation was up 0.6% year on year.

PPI inflation didn't do any better. In November it was down 3.0% year on year and down 0.3% month on month.
The weak inflation numbers are once again encouraging calls for more stimulus and more supportive fiscal policy, but what China needs is better-directed stimulus, not more stimulus. As it forces the economy to redirect investment from property to manufacturing, this...
Read 6 tweets
Dec 7
Chris Giles is absolutely right to say that when changes in the relative size of two economies are driven by changes in their currency values, there is very little economic meaning in those changes.

via @ftft.com/content/c406ef…
For example if the recent contraction in the Chinese economy relative to the US economy was driven mainly by a strengthening of USD strengthened against RMB, we shouldn't read anything substantial or meaningful in this change. It could easily reverse next month.
But, ironically, it is just as wrong to compare the US and Chinese economies on a PPP-adjusted basis, even though the point of the PPP adjustment is precisely to correct for changes in currency values, presumably by focusing on the real value of goods and services.
Read 14 tweets
Dec 6
Bloomberg: "CUFE professor Qiao Baoyun also took aim at Moody’s in the same report. Its view on the debt risks that local government financing vehicles face is inaccurate, he said. This was because the government has amassed...

via @bpoliticsbloomberg.com/news/articles/…
a large amount of quality assets after years of infrastructure investment, which should be taken into consideration."

Qiao is right, and I think not enough analysts recognize these assets when considering the "bankruptcy" of local governments.
But all governments own, or can seize, more assets than they have debt. This doesn't mean that all governments should have AAA ratings. The problem is that the political cost of liquidating or transferring these assets – which can involve a major restructuring of...
Read 7 tweets
Dec 4
In this just-published Carnegie piece I discuss what it would mean for China to grow by 4-5% annually for the next decade. I argue that global constraints that could be ignored when China was much smaller can no longer be ignored.

I show with some fairly simple arithmetic that unless China were to sharply rebalance its economy (something that won't be easy), a decade of 4-5% growth would inexorably cause China's share of global investment and global manufacturing to rise by...
more than 5 percentage points of global GDP (to 37-8%), even as its share of global GDP rises by less than 3 percentage points (to 21%) and its share of global consumption rises by less than 2 percentage points (to 15%).
Read 5 tweets
Dec 4
Very interesting SCMP piece: "In a rare acknowledgement of the regional financial struggles facing one of China’s most destitute regions, state media has reported on the crushing fiscal pressure resulting from overstaffing."

via @scmpnewssc.mp/dr18?utm_sourc…
The article continues: "The report by China Comment, a fortnightly current-affairs magazine affiliated with Xinhua, explored how the continuous expansion of government workers has taken a toll on local-level finances."
It seems that in order to relieve local unemployment, local governments are effectively providing disguised "unemployment benefits" through part-time employment, but this is causing their debt burdens to balloon.
Read 5 tweets
Nov 29
In what seems like a very interesting comment on the issues facing the Chinese economy, PBoC Governor Pan Gongsheng warned that China's "ongoing economic transformation will be a long and difficult journey, but it’s a journey we must take."

He went on to say: "The traditional model of relying heavily on infrastructure and real estate might generate higher growth, but it would also delay structural adjustment and undermine growth sustainability."

That seems a pretty significant statement to me.
That's because I think it may be one of the few times a very senior official has publicly put both property investment and infrastructure investment in the same "unsustainable" category. The former has been acknowledged since 2021, but China still encourages the latter.
Read 6 tweets

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