Michael Pettis Profile picture
Finance Professor, Peking University, and Senior Fellow, Carnegie-Tsinghua Center
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18 Apr
1/7
The idea that there is some specific debt-to-GDP ratio above which debt levels are "too high" has always been nonsense, and only suggests how poorly economists understand balance sheet dynamics (and how little they have read of Hyman Minsky).

wsj.com/articles/u-s-d…
2/7
It is not just the amount of debt and the coupon that matter but, as any finance specialist can explain, just as important are the structure of the debt relative to assets, the underlying volatility of operating earnings, overall liquidity, the purpose of the debt, and...
3/7
other conditions which together determine whether a business or country has "too much" debt. And of course this doesn't mean that because interest rates are low there is no threshold above which the debt burden starts to weigh on the economy.

project-syndicate.org/commentary/the…
Read 9 tweets
18 Apr
1/5
While much of the foreign press announced spectacular Q1 GDP results, Caixin, characteristically, recognized that part of the reported growth simply represented an expansion of the domestic imbalances.

caixinglobal.com/2021-04-16/chi…
2/5
Their headline: "China’s Rapid GDP Growth Falls Short of Expectations". As they note, "Both household income and consumption grew slower than GDP."

This matters. While I expect China's reported GDP growth to be strong this year (although not nearly as strong as...
3/5
the 8.6% consensus), much more important is that it will mostly be what Beijing refers to as "high-quality" growth, which means that consumption, exports and private business investment will collectively outpace GDP growth.
Read 5 tweets
16 Apr
1/14

China’s National Bureau of Statistics reported today that GDP grew by 18.3% year-on-year in the first quarter of 2021, although on the back of a sharp contraction in the first quarter of 2020, and driven – unfortunately but not...

caixinglobal.com/2021-04-16/chi…
2/14

surprisingly – by a 25.6% year-on-year expansion in fixed asset investment. Given how useless year-on-year data can be, especially after exceptional periods, many analysts are also reporting that first-quarter GDP rose 0.6% from the fourth quarter last year.
3/14

But while this helps, it ignores appropriate measures of seasonality, which are especially problematic in a period like ours. The best way to consider the data might be to see how close we've arrived at some kind of “normalcy”, perhaps by comparing it with 2019 data.
Read 16 tweets
15 Apr
1/5

Good Bloomberg article on the Huarong mess, some of its systemic implications, and what it says about China's underlying debt problems.

A lot of people already knew at least five years ago, and possibly more, about the tremendous hole into...

bloomberg.com/news/articles/…
2/5

which Huarong was dogging itself — among friends of mine who worked with the big four AMCs, none of whom were notorious for excessive prudence, Huarong managed nonetheless to elicit shock and surprise for its behavior, especially its seemingly reckless acquisitions.
3/5

This particular line in the article reminded me of a conversation I had in 2018 or 2019: "According to people familiar with the matter, Huarong has proposed a sweeping restructuring. The plan would involve offloading its money-losing, non-core businesses. Huarong is still...
Read 5 tweets
15 Apr
1/8

Beijing plans to make it easier for migrants to apply for household registration in the cities in which they live and work. This is good news, and the benefits are fairly obvious: by raising the real income of migrant workers — allowing them...

caixinglobal.com/2021-04-14/chi…
2/8

access to the same municipal services and work protection as hukou residents — it will sustainably boost domestic demand

But while this benefit has always been there, it has taken very long for Beijing to reach even this very preliminary step. Why? Because the benefits...
3/8

come with real costs, and until we know how these costs will be allocated, it isn't clear how serious they are about implementing hukou reforms.

To the extent that the welfare of migrant workers improves, the associated costs have to be absorbed by some other sector for...
Read 8 tweets
14 Apr
1/8

Good blog piece by @andrewbatson on China's "new rhetoric" on reducing inequality, which (and Andrew decides sensibly to skip the obvious irony) begins with: "The Chinese Communist Party is now ideologically committed to reducing income inequality."

andrewbatson.com/2021/04/13/chi…
2/8

In his piece he points out some of the steps Beijing says it will take to reduce inequality within the household sector, and he notes the limited success it has had in the past. I would add another point, which is that there are two very different types of inequality...
3/8

within China, both of which have the same economic effect on China's very low consumption rate and (which is the same thing) its excessive savings rate.

One type, which most of us typically mean by "inequality", is the highly concentrated distribution of income within...
Read 8 tweets
14 Apr
1/19

Apologies in advance for this very long thread, but as regular readers know, I worry greatly about common misunderstandings of the role of reserve currencies. The author seems to assume that what makes a currency a dominant reserve currency is...

ft.com/content/3fe905…
2/19

its low frictional trading costs, which is why, he believes, digital currencies, with China in the lead, will dominate international trade.

But while a low frictional trading cost is a necessary condition, it is not nearly sufficient. A quick glance at the role of the...
3/19

US dollar over the past 100 years, the period during which it achieved dominant status, makes this clear: when the world was short of savings relative to its investment needs, during the first fifty years of that period (a period characterized by the global need to...
Read 21 tweets
14 Apr
1/4

"China Huarong has been under a shadow since its then-chairman Lai Xiaomin came under investigation in 2018. Under his watch, the company expanded into areas including securities trading, trusts and other investments, deviating from the original...

bloomberg.com/news/articles/…
2/4

mandate of disposing bad debt."

Actually it was known long before Hai's arrest that questionable things were happening at Huarong, and that they were involved in activity that none of the other AMC's — no paragons of virtue themselves — would accept. I have many friends...
3/4

and former students who worked with the AMCs as customers or counterparts or in related firms, and for several years before then it was already being pretty openly discussed.

With $42 billion worth of offshore and local bonds ($22 billion in USD) of which 41% matures by...
Read 4 tweets
13 Apr
1/5

China's trade surplus in March was the lowest in a year – $13.8 billion, or roughly 1% of GDP – mainly because of higher-than-expected imports. Chinese custom officials seem to think strong imports are a problem, and blamed higher commodity prices.

scmp.com/economy/china-…
2/5

That brings the Q1 trade surplus to $117.1 billion, or just under 3% of China's GDP. This is still much higher than a world struggling with weak demand can reasonably expect to absorb: the equivalent of a fiscal contraction of roughly 0.5-0.6 percentage points of GDP for...
3/5

the rest of the world, although mostly concentrated in the Anglophone economies, who collectively absorb over two-thirds of the global demand imbalance. Still, it's better than trade surplus during most of last year equal to roughly 5% of Chinese GDP.
Read 5 tweets
12 Apr
1/6

Thanks, Diane. You make an important point, which is that the main problem is not that they are lying about their GDP data, as many people assume, but rather that China's GDP data measures things (investment, for example) that in some cases represent real growth in the...
2/6

underlying economy and in other cases don't. The problem is that we don't distinguish the difference between the two.

The CIA stats on the USSR, for example, did a better job of measuring "actual" economic activity than the published Soviet reports, but then we simply...
3/6

assumed – incorrectly, as it turned out – that this economic activity must have the same relationship to the underlying economy as it did in more market-driven economies like that of the US and the UK. The fact that economic agents in these economies operate with hard...
Read 6 tweets
12 Apr
1/6

The Biden administration’s stimulus package is definitely good for US growth – more US consumption encourages US businesses to invest more – but part of this positive impact will be dissipated by an expanding US trade deficit, the consequence of...
scmp.com/economy/china-…
2/6

which would be effectively to convert a portion of the increase in US consumption into an increase in foreign savings, much or most of which the US will be forced to absorb.

The problem isn’t that an increase in US demand will flow abroad in the form of...
3/6

imports. This wouldn’t matter if US trade partners implemented similar policies that focus on expanding the demand-side of their economies, in which case higher US imports would be balanced by higher US exports.
Read 6 tweets
11 Apr
1/8

Zhang Bin notes that China’s reliance on debt-fueled growth – especially local-government debt – is creating huge systemic risks for the economy and argues that Beijing should rely more on US-style quantitative easing, rather than Chinese-style...

scmp.com/economy/china-…
2/8

fiscal expansion, to power growth. Among other things he says the former will lower debt costs, strengthen the role of the private sector, and raise the consumption share of GDP.

While he is certainly right to worry about China’s terrible debt burden and the role of...
3/8

fiscal spending in driving it, I am not sure US-style QE will help. To the extent it lowers borrowing costs, this will mostly come at the expense of depositors, which means downward pressure on the household share of GDP and, with it, on the consumption share, in which...
Read 8 tweets
11 Apr
1/6

NOPE apparently means “net options pricing effect”, and the "theory" recognizes that delta hedging is highly self-reinforcing – i.e. rising prices force delta hedgers to buy, thus pushing prices up further, while falling prices do the opposite.

ft.com/content/dd3b8f…
2/6

We've known this for a long time, however, and it is true of any form of leverage, with the main difference between "straight" leverage and leverage through options being that the former is linear and the latter non-linear.
3/6

I discuss this in my 2001 book, for example, as an example of balance-sheet "inversion", as have George Soros, Hyman Minsky and, in a different way, Irving Fischer. When I used to trade Latin American bonds, we always kept an eye on the amount of...

amazon.com/Volatility-Mac…
Read 6 tweets
10 Apr
1/4

It is probably much too late, but Beijing seems more determined than ever to take steps to stabilize home prices, with the deputy housing minister repeating the now-common mantras: “Local governments should take responsibility to ensure that a...

scmp.com/business/china…
2/4

home is for living in, not for speculation, and should not use the real estate sector as a short-term tool to stimulate economic development.”

That sounds reasonable, but the fact remains that the real estate sector and infrastructure spending are China’s most important...
3/4

tools for stimulating economic activity. Beijing cannot expect to come close to doubling GDP in 15 years without extensive use of both tools, which means that while they might be able to rein in housing prices this year as a partial reversal of last year’s terrible...
Read 4 tweets
9 Apr
1/10

CFR has put together an excellent “Global Imbalances Tracker” that allows users access to current account data in a very handy format. There were two things that struck me most as I went through it.

on.cfr.org/3mIWx7W via @CFR_org
2/10

First, CFR helpfully groups together the Anglophone countries (US, UK, Canada, Australia, NZ) to show that collectively they typically account for roughly 2/3s to 3/4s of global current account deficits. This is an extraordinarily high share, especially considering that...
3/10

trade theory suggests advanced economies should generally be running surpluses. In fact the CFR data show that other advanced economies do indeed overwhelmingly run current account surpluses, collectively accounting for roughly two-thirds of total global surpluses.
Read 10 tweets
8 Apr
1/10

Good piece by @yuenyuenang in which she argues that the conditions have changed that once made GDP growth targets useful as a way of organizing and directing China's growth model. What made crude sense when China was very poor no longer makes sense.

scmp.com/comment/opinio…
2/10

I agree. In the 1980s China was so underinvested for its level of institutional development that the best thing it could do for growth was to organize its financial and governance systems around maximizing investment in infrastructure and manufacturing. It didn't even...
3/10

matter how poorly projects were selected and how inefficiently the financial system allocated capital as long as investment was maximized.

GDP growth targets in that case helped because all it took to meet them was more gross investment, and so they became a...
Read 10 tweets
7 Apr
1/4

Good piece by @endacurran on the risks associated with the surge in hot money inflows into China, and Beijing's attempt to counter some of the adverse monetary and currency impact with a slew of small measures to encourage outflows.

bloomberg.com/news/videos/20…
2/4

The problem is that even if they succeed in encouraging outflows when they need them (about which I am skeptical), this will not do anything to fix the very negative balance-sheet impact.

I've been arguing since late last year that this is going to be something we...
3/4

increasingly talk about, especially towards the end of this year and next. The IMF claimed in their press conference Tuesday that foreign investors are allocating stable capital into. China, and that this capital is unlikely to flit around, but I am pretty skeptical.
Read 5 tweets
7 Apr
1/7

As expected, consumption in China seems to be rebounding strongly, and exports are expected to continue growing. The IMF is taking this to mean that they should upgrade their 2021 GDP growth expectations for China to 8.4%.

xinhuanet.com/english/2021-0…
2/7

My view is different. I think strong consumption and export numbers will give Beijing a chance to cut back more sharply on credit growth, which basically means cutting back on investment in real-estate development and infrastructure...

imf.org/en/News/Articl…
3/7

spending, which is why I expect consumption and exports to continue strengthening without raising GDP growth expectations. Remember that Beijing uses this investment mainly as the residual needed to plug the gap between "high quality growth" and the...
Read 8 tweets
6 Apr
1/7

Very interesting piece by @Birdyword on some of the ways property developers like Evergrande manage debt, partly by replacing debt-like instruments that are classified as debt with debt-like instruments that are not technically classified as debt.

wsj.com/articles/everg…
2/7

We've seen similar things many times before, for example when local governments replaced their direct borrowings, which showed up as local government debt, with borrowing through SPVs, which didn't. Anyone very familiar with the history of these borrowing frenzies knows...
3/7

that in the late bubble stages not only do we usually get financial "innovation" that allows borrowers to reclassify or disguise what is still fundamentally debt (remember the Greek loan disguised as a currency swap?), but worse, these structures often highly...
Read 7 tweets
5 Apr
1/5

Rajan is right to question "the notion that industrial countries can allow their sovereign debt to grow indefinitely". One of the many ways to misunderstand MMT is to believe that boosting domestic-currency government debt doesn't matter.

ft.com/content/4121ba…
2/5

But it does indeed matter – beyond some level a higher debt burden can raise real costs for the economy, increase volatility, and reduce balance-sheet flexibility. But because I think the global economy is demand constrained, and not supply constrained, I am less worried...
3/5

than Rajan about the debt impact of "badly designed handouts".

What matters is not a nominal increase in the debt but rather an increase relative to the real debt-servicing capacity of the economy, for which GDP is a proxy, and to the extent that these handouts are...
Read 5 tweets
4 Apr
1/11

Although engineers in democracies may look longingly at the ability of authoritarian governments to force through major infrastructure projects, it is a mistake to think that this is the important difference between...

wsj.com/articles/what-…
2/11

infrastructure building in China and the US. The checks and balances in democratic systems may reduce efficiency, but they are better at long-term adjustment, and so the differences reflect little more than the standard trade-offs between the two systems.
3/11

What really matters is the relationship between desired and actual investment. In the early 1990s, when it really began its infrastructure-building spree, after five decades of war and Maoism China was hugely underinvested in infrastructure for its level of development.
Read 12 tweets