Michael Pettis Profile picture
Senior Fellow, Carnegie Endowment. For speaking engagements, please contact me at chinfinpettis@yahoo.com
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Mar 28 9 tweets 2 min read
1/9
"Former President Donald Trump’s idea to implement a 10% tariff on all imported goods would spike prices by as much as $1,500 annually for American families, according to a news analysis."

I find these types of incremental studies to be hopeless.

semafor.com/article/03/27/… 2/9
Tariffs are just one of many kinds of industrial or trade policies that work by shifting income from the household sector to subsidize the productive sector. While they may reduce foreign supply of the tariffed good, they also increase total supply of domestic tradable goods.
Mar 27 6 tweets 2 min read
1/6
FT: "There’s a common consensus: Japan’s demography is one of, if not the, root causes of its deflation challenges."

Japan (and China) have shrinking populations and suffer from deflation. So shrinking populations must be deflationary, right?

ft.com/content/6aac7c… 2/6
But it's not quite that obvious. What unites these two economies is not just shrinking populations, but also low household income shares of GDP and, as a consequence, weak consumption and an excess reliance on investment and trade surpluses to drive growth.
Mar 27 9 tweets 2 min read
1/9
"One camp says the yuan will likely stabilize because the PBoC is trying to curb its depreciation, while another argues volatility will increase as officials are trying to loosen their grip on the currency and guide it lower to boost exports."

bloomberg.com/news/articles/… 2/9
There certainly is pressure on the PBoC to weaken the RMB in order to boost exports further. I don't know what the current thinking is, but the PBoC used to understand that this was actually counterproductive, and would hurt the economy by further weakening domestic demand.
Mar 25 10 tweets 2 min read
1/10
"China’s high-tech sector is driving an increasing amount of demand for goods and services in the world’s second-biggest economy, and its contribution could rival real estate by 2026, according to Bloomberg Economics."

via @technologybloomberg.com/news/articles/… 2/10
"With the property sector forecast to continue shrinking in the coming years," BE adds, "the fast growth of high tech industries and their increasing economic weight make them a promising growth engine."

BE may be making the same mistake analysts made in 2022-23.
Mar 24 12 tweets 3 min read
1/12
"The new elite project is industrial policy, with a focus on creating national champions," Raghuram Rajan says, adding that "countries will have to relearn the lesson that governments are not good at picking winners."

Neither claim is true.

ft.com/content/73bf74… 2/12
US industrial policy, for example, is not about creating national champions but about protecting domestic industries from very aggressive beggar-thy-neighbor policies implemented elsewhere. The US share of global manufacturing has declined sharply over the past few...
Mar 22 7 tweets 2 min read
1/7
More and more prominent Chinese economists are calling for fiscal transfers to the household sector. In this recent piece, Zhang Jun, Fudan's dean of economics, argues that Beijing should embark on "a comprehensive strategy to support and enhance...

eastisread.com/p/zhang-jun-ad… 2/7
real household incomes, with fiscal spending directed towards families aiming to boost the real income of middle and low-income families. This approach should include a significant increase in transfer payments to families."
Mar 21 12 tweets 3 min read
1/12
The chief European economist at T Rowe Price writes about the economic consequences of financial repression: "These policies crowd out private sector investment. In the short term, this will lead to lower growth and inflation, as monies which...

ft.com/content/4ebe53… 2/12
would have been invested in the private sector capital stock are spent on public debt service and repayment instead. But in the medium term, lower accumulation of capital will result in a structurally more rigid supply side of the economy."
Mar 20 5 tweets 1 min read
1/5
FT: "The balance of trade in goods hit €28bn in January, its highest level since authorities started tracking data in 2002. Last year, the eurozone recorded a trade surplus of €64bn, in contrast with the record €335bn deficit it suffered in 2022."

ft.com/content/1e6b6f… 2/5
With the eurozone and China exporting record amounts of deficient demand into the global economy, this puts more pressure than ever on the US, the UK, Canada and developing world to protect the supply side of their domestic economies.
Mar 19 4 tweets 1 min read
1/4
Peter, I should have distinguished more clearly between subsidies for one productive sector that come at the expense of another, and subsidies for production generally that come at the expense of household demand. 2/4
While arguments can be made against the former, they can also be justified as an inevitable part of the development process because they are designed mainly to shift the basis of comparative advantage. They include Hamilton's "infant manufactures" policies.
Mar 19 14 tweets 3 min read
1/14
A director at the American Enterprise Institute is warning that protectionism has run amok in the US.

Nonsense. Protectionist economies are those in which manufacturing is subsidized through direct and indirect transfers from the household sector.

ft.com/content/cdd09f… 2/14
These transfers suppress domestic demand, with the cost externalized in the form of persistent trade surpluses. The result is that protectionist economies have high manufacturing shares of GDP, weak domestic demand and persistent trade surpluses.

carnegieendowment.org/chinafinancial…
Mar 14 6 tweets 2 min read
1/6
"China aims to increase investments for equipment in heavy industry, construction, agriculture, transport, education and healthcare by at least 25% in 2027 compared to last year. Big-ticket items like automobiles, home appliances and furniture...

sc.mp/vc0xf?utm_sour… 2/6
are high on the priority list for the trade-in programme."

These trade-in programs increase near-term spending by creating incentives for households and businesses to accelerate spending plans. Instead of replacing your furniture next year, in other words, do it today.
Mar 13 6 tweets 2 min read
1/6
Two prominent PKU economists, Huang Yiping and Lu Feng, are warning that Beijing's industrial policy "is at the heart of US concerns about Chinese overcapacity and the European Union’s anti-subsidy investigation into Chinese electric vehicle imports."

bloomberg.com/news/articles/… 2/6
China is implicitly relying on a major expansion in its share of global manufacturing to balance its restructuring of domestic investment. Beijing was nonetheless surprised by the vehemence of the reaction in the US, the EU, Japan and India.

carnegieendowment.org/chinafinancial…
Mar 13 8 tweets 2 min read
1/8
Good FT article: "Beijing has ordered a dozen highly indebted areas, many of them less-developed and far from the coast, to curb infrastructure spending as it tries to unwind a decade-long investment binge many believe is unsustainable."

ft.com/content/901bc6… 2/8
In the end, a reduction in infrastructure spending in the poorer provinces may just be balanced with an increase in infrastructure spending in the richer provinces, so it is still too early to tell but, with these recent announcements, we may finally see the beginning of....
Mar 12 8 tweets 2 min read
1/8
Good FT piece by Ethan Wu on China's growth prospects. One way for China to achieve the 5% GDP growth target is through a boost in investment, but there are constraints on all three of the standard investment "growth engines": property, infrastructure and manufacturing. 2/8
If a surge in investment isn't in the works, and because China is too big to depend on a surge in the trade surplus to do the trick, the only other way to hit the 5% GDP growth target is through a surge in consumption.

But is that likely?
Mar 10 5 tweets 2 min read
1/5
No concrete signs, Martin, but just the logic of the system. Beijing has chosen a high GDP target that must be driven by some sector or other of the economy. China is too big to rely on net exports, so it must be something that drives either consumption or investment. 2/5
But investment in the property sector is likely to be weak again this year, there are signs that investment in infrastructure will also be limited, and the obvious external constraints make investment in manufacturing unlikely to play the role Beijing hopes it will.
Mar 8 6 tweets 2 min read
1/6
Yicai: "China will gradually defuse local governments' debt risks through high-quality development, according to Lan Foan, the finance minister."

yicaiglobal.com/news/china-wil… 2/6
Lan implies that too much funding in the past was directed towards investment projects that did not generate positive returns, which is why local governments have run into debt management problems.

I wrote about this three months ago.

ft.com/content/630f82…
Mar 7 5 tweets 2 min read
1/5
In the first two months of 2024 Chinese exports rose to RMB 3.75 trillion, a year on year increase of 10.3% in RMB terms and 7.1% in USD terms. Imports rose to RMB 2.86 trillion, or 6.7% in RMB terms and 3.5% in USD terms.
english.news.cn/20240307/e6dde… 2/5
The net impact was a trade surplus of RMB 890 trillion, equal to roughly 4.5% of China's GDP.

Most analysts and the press are treating the stronger-than-expected trade numbers as good news for the economy. The consensus was for export growth in USD terms of of only 1.9%.
Mar 5 7 tweets 2 min read
1/7
By posing local-government investment in manufacturing as the alternative to property investment, this article suggests the problem: neither form of investment is about economic sustainability, and both forms are about achieving politically determined GDP growth targets. 2/7
Expanding overcapacity in manufacturing cannot succeed in delivering sustainable growth any more than expanding overcapacity in the property sector, but the extent to which it provides temporary relief in the next year or two will, I suspect, depend mainly on the EU.
Feb 29 4 tweets 2 min read
1/4
Matt Klein as uncovered a remarkable CIA memo from April 1986 that assesses Japan's structural demand imbalances, their trade impacts, Tokyo's resistance to adjustment policies, and how these were likely to be affected by rising global protectionism. 2/4
The memo is remarkable because it makes so clear the extent of the structural similarities between China today and Japan in the late 1980s. It also notes how trade and other imbalances were the result of what Tokyo considered to be domestic industrial policies.
Feb 29 5 tweets 2 min read
1/5
"Business and economic models like China’s that are based on large trade surpluses “may no longer be politically sustainable,” Mario Draghi said in a recent speech. “This change in international relations will affect the global supply of savings.”"

bloomberg.com/news/articles/… 2/5
Draghi makes an important point. If the world becomes increasingly reluctant to run the deficits that correspond to beggar-thy-neighbor trade policies in trade-surplus economies, they will force surplus countries to resolve their domestic demand imbalances.
Feb 28 4 tweets 1 min read
1/4
According to the FT, the Shenzhen government has unveiled 24 measures to support a big expansion of car exports, including support for factory construction, opening new sea routes and allowing another 20 companies to export second-hand cars.

via @ftft.com/content/efb4ce… 2/4
This is yet another example of how, for all the talk about boosting consumption and rebalancing the economy towards domestic demand, local governments are far more aggressive implementing supply-side measures than implementing demand-side measures.