Michael Pettis Profile picture
Finance Professor, Peking University, and Senior Fellow, Carnegie Endowment. For speaking engagements, please contact me at chinfinpettis@yahoo.com
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May 23 10 tweets 3 min read
The CEO of Warburg Pincus reflects the opinions of many at Davos when he worries that globalization is threatened because geopolitics has moved from the "the fringe of the way we thought” to "front and center".
ft.com/content/059987… 2/10
“You’re not optimizing the economic outcome," he said of rising geopolitical tensions, "you’re creating friction in the system.” Geopolitical concerns, in other words, are a kind of frictional cost that limits the mobility of financial capital.
May 21 11 tweets 3 min read
Good article by @PearlLiu. She points out the private developers that were once bailing out their more troubled competitors are now themselves in trouble. Ultimately I expect more of the sector to be taken over by state-owned developers.
scmp.com/business/compa… via @scmpnews 2/10
The problem is that the sector got itself caught in a multi-decade self-reinforcing loop. This worked on the way up, when vibrant sales boosted prices and property-sector activity, which in turn raised expectations and so encouraged even more buying and building.
May 20 4 tweets 1 min read
The unexpectedly large PBoC cut in the mortgage benchmark, aimed at "stabilizing" the real estate market, can be seen as a partial reversal of Beijing's decision to rein in the property sector, the impact of which exceeded its own worst expectations.
ft.com/content/ddddbc… 2/4
Beijing, in other words, is trying to reverse, at least partially, its actions last year. The problem is that those actions were necessary. The property sector had become the major source of unhealthy economic activity and one of the main causes of surging debt.
May 18 4 tweets 2 min read
Good piece by Anthony Rowley on the increase in global debt burdens, but where I disagree is with his assumption that the reason "too much" debt is bad for the economy is that it might lead to a debt crisis.
scmp.com/comment/opinio… via @scmpnews 2/3
A debt crisis is just the most spectacular way "too much" debt is resolved. The point is that if additional debt funds activities that directly or indirectly increase the value of goods and services produced by the economy, there is no meaningful increase in the debt burden.
May 16 8 tweets 2 min read
Everyone expected April numbers to be bad, but in fact they were worse. For me the most worrying part of the data release was the surge in the gap between retail sales, down 11.1% year on year in April, and industrial output, down 2.9%.
reuters.com/world/china/ch… 2/7
This gap has to be balanced either by more unwanted investment (in infrastructure or inventory, for example) or by an even bigger trade surplus. Without either of these the gap can only be narrowed by a fall in output and, with it, a rise in unemployment.
May 15 11 tweets 3 min read
Very interesting (and unsettling) piece by Wolfgang Münchau on the implications of Germany's industrial model. Towards the end he notes that "The country’s legendary savings surpluses are funding an uber-competitive industry."
@EuroBriefing eurointelligence.com/column/network… 2/10
In fact the factors that boost German savings rates are also what makes German industry "uber-competitive". German exports are not internationally competitive because high domestic savings have funded the high investment levels that make German exports competitive.
May 12 6 tweets 2 min read
Good article by Sun Yu and @tmitchpk on China's irreconcilable conflict between zero-COVID and economic growth. As Plenum's Chen Long says, "Zero-Covid still trumps the economy for now.”
ft.com/content/69ac04… 2/6
One of the article's most important points is the enormous pressure local governments are facing. Their land-sale and tax revenues are collapsing just as they are being required significantly to expand spending on COVID-related measures and on infrastructure.
May 11 7 tweets 2 min read
MoFA spokesman Zhao Lijian is right to say that "The US’ unilateral tariffs imposed against China do not benefit the US or the world", but he, and others, are confused when they then claim that ending the tariffs will be disinflationary for the US.
scmp.com/economy/china-… 2/7
Except in shifting around a small portion of US-China trade, bilateral tariffs had almost no impact at all on the overall balance between the supply and demand for goods and services within the US, and there's no reason why eliminating them will be any different.
May 11 5 tweets 1 min read
"China is expected to deepen deposit rate reforms to lower corporate financing costs."

Lowering interest payments on household deposits in order to lower borrowing costs for businesses effectively transfers income from households to businesses.

en.people.cn/n3/2022/0511/c… 2/5
I know central banks everywhere tend reflexively to lower interest rates when the economy slows, but this assumes either that lower interest rates will boost consumption or that business investment is constrained mainly by expensive capital.
May 11 8 tweets 3 min read
Great piece by Kevin Rudd on the politics of a slowing economy. He says "the big question is whether Mr. Xi has gotten China’s underlying policy direction badly wrong—and if so, if he is willing and able to change course."
wsj.com/articles/xi-sc… 2/7
I see it differently. Many China analysts – especially among former bulls – argue that China's recent economic problems reflect a sharp policy discontinuity, driven mainly by an unexpected change in Beijing's attitude towards the economy and especially the private sector.
May 9 4 tweets 2 min read
Good article. @yifanxie argues that "China is less susceptible to demand-led inflation than countries like the U.S. because it relies more heavily on investment than consumption to drive growth."
wsj.com/articles/china… via @WSJ 2/4
That's an important point. Supply-side policies in an environment of weak demand are necessarily disinflationary because they boost the production of goods and services relative to demand for those goods and services.
May 7 7 tweets 2 min read
While FDI flows globally were up 88% last year, the U.S. was the biggest recipient, with foreign investment flows into the country up 133% to $382 billion (equal to 1.7% of US GDP).
wsj.com/articles/war-i… via @WSJ 2/7
Although this is classified as FDI, most foreign FDI into the US consists of acquisitions of existing businesses, not investment in building new facilities. Foreign investment into the US is surging because of economic stability and expectations of rapid growth.
May 7 4 tweets 1 min read
"Beijing has pledged to speed up infrastructure spending to steady the economy," says SCMP, "but it is also wary of growing debt." Much of the heavy lifting is being done by local governments.
scmp.com/economy/china-… via @scmpnews 2/4
Andy Collier puts it this way: “The stimulus is pushed down to lower levels, where the messy politics of excess leverage, default, and unemployment can be fought – town by town.”
May 5 4 tweets 1 min read
Once the main way VCs made money stopped being the rising operating return on capital of the businesses into which they invested and instead became rising valuations based on ever-increasing investment inflows, the VC dynamics changed considerably.
ft.com/content/077de7… 2/4
It's not as if something similar hasn't happened before. In every previous technology boom—e.g. during the 1860s, the 1920s, the 1960s, etc.—we saw the same process.
May 5 5 tweets 2 min read
Why do people say things like this? According to Luca Fantacci, an economic historian at the University of Milan "Unlike other countries, the United States can meet their international obligations by printing money."

euronews.com/next/2022/05/0… 2/5
He adds: ""Meaning that they have no budget constraints in making expenditures, loans or even grants abroad".

This is simply not true.
May 4 7 tweets 2 min read
"Strong U.S. demand for computers, vehicles and oil helped drive the U.S. trade deficit to a record of $109.8 billion in March," the WSJ says.

This just shows how confused most people are about the causes of trade imbalances.
wsj.com/articles/surge… via @WSJ 2/7
Strong demand for computers, vehicles and oil may have indeed accounted for a rising share of imports, but they didn't drive up the deficit. The deficit necessarily reflects the imbalance between domestic savings and domestic investment.
May 4 6 tweets 2 min read
The FT argues that yen weakness and low interest rates create "a fresh opportunity for the BoJ to achieve its goal of many decades: reflation of the Japanese economy."

But this hasn't worked in three decades. Why should it work now?
ft.com/content/9acaf2… 2/6
A weaker yen effectively transfers income from importers (who in Japan are disproportionately households) to exporters (who are mostly manufacturers). A weaker yen, in other words, subsidizes supply at the expense of demand.
May 4 5 tweets 1 min read
"If there’s one thing China’s policymakers have called for consistently", this Caixin editorial notes, "it’s a boost to consumption." Yes, but if there is one thing they have been unable to do in 15 years, it is to boost consumption sustainably.
caixinglobal.com/2022-05-03/edi… 2/5
In the rest of the editorial Caixin maintains the confusion between supply-side boosts to consumption and demand-side boosts that is typical of much of the discourse in China, but at least...
May 4 6 tweets 2 min read
I've long argued that when China begins – or is forced – to adjust from the current growth model, at the heart of the adjustment process will be a conflict between the central government and the local and provincial governments.
scmp.com/news/china/pol… via @scmpnews 2/6
That's because local and provincial elites benefitted disproportionally from China's investment-oriented, supply-side approach to maintaining high growth rates, and so, not surprisingly, they must disproportionately suffer the costs of reversing those policies.
May 2 8 tweets 2 min read
In the article linked below, Andrew Sheng and Xiao Geng write: "Building a more stable international monetary system demands a shift to a truly global currency. The SDR is the most obvious candidate." 2/8
Like other analysts, however, they focus on the cosmetics and ignore the fundamentals. They claim that the constraint is the refusal of the US to give up its "exorbitant privilege. This is simply not true.
May 2 5 tweets 1 min read
Interesting interview. The argument former BoJ governor Shirakawa Masaaki often hears from Chinese experts — and disagrees with — is that “Japan's signing of the Plaza Accord in 1985 led to the subsequent downturn in the Japanese economy.”
caixinglobal.com/2022-04-30/wee… 2/5
This is a very widespread misconception in China, where few seem to know that as part of the Plaza Accords the German currency appreciated as much as the Japanese currency did, but with very different consequences.