Michael Pettis Profile picture
Senior Fellow, Carnegie Endowment. For speaking engagements, please contact me at chinfinpettis@yahoo.com
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Jun 17 8 tweets 2 min read
"Has China’s property market hit bottom?" Bloomberg asks. "Not quite yet, according to May data, and to the National Bureau of Statistics, which said easing measures will need more time to take effect."

via @marketsbloomberg.com/news/articles/… 2/8
Prices for new homes in the top 70 cities first began to decline month on month in October 2021, and except in January-March and June-July in 2022 and January-May in 2023, when prices were flat or rising, prices have fallen every month since.
Jun 17 5 tweets 2 min read
I think Bloomberg has got it right: "China’s industrial expansion slowed in May and retail spending beat forecasts, a sign that deep imbalances in the economic recovery may be easing at least a little."

via @marketsbloomberg.com/news/articles/… 2/5
While many analysts worried about the slowdown in industrial output, China doesn't have a supply-side problem. It is true that May's year-on-year increase in industrial output (5.6%) was lower than April's (6.7%), but year to date it was nonetheless up a hefty 6.2%.
Jun 16 11 tweets 3 min read
Maurice Obstfeld says that "a capital inflow tax is a bad idea". Why? Because "when a country’s imports exceed what it can pay for through its exports, it must borrow from foreign residents to cover the difference."

prosyn.org/LSh0gJY 2/11
"The capital inflow tax," he continues, "would, of course, raise the cost of foreign borrowing by the amount of the tax. But perhaps less obviously, it would also raise the interest rate paid by every US borrower on every loan."
Jun 15 10 tweets 3 min read
According to Pekingnology, Tsinghua's Li Daokui believes Beijing has finally gotten around to the idea of a major fiscal push to stimulate domestic consumption.

I've argued the same since March, but for different reasons.

@ZichenWanghere pekingnology.com/p/3rd-plenum-p… 2/10
Li's argument is that Xi Jinping and the people around him have had a change of view on the idea that support for the household sector will cause Chinese workers to become lazy (he calls it the British disease). They are now more willing to subsidize household spending.
Jun 15 6 tweets 2 min read
Very good Caixin article on attempts by overly-indebted provinces to reduce hidden borrowing on the balance sheets of local government financing vehicles. Some "are now attempting to transform some of their LGFVs into 'market-oriented' entities."

caixinglobal.com/2024-06-14/in-… 2/6
These include industrial investment platforms, but here lies the problem. If the purpose of these platform is to shift bad investment from one entity to another, it can only shift the locus of hidden debt, not resolve it.
Jun 14 11 tweets 3 min read
The European Commission's recent decision to impose provisional duties on imports of electric vehicles (EVs) from China is "blatant protectionism", according to China's Ministry of Commerce, and "will create and escalate trade frictions."

english.news.cn/20240613/28c75… 2/10
"It not only undermines the legitimate rights and interests of China's EV industry", the ministry continues, "but also disrupts and distorts the global automotive industrial and supply chains, including those in the EU."
Jun 13 4 tweets 1 min read
Good article by SCMP's Frank Chen on potential corporate governance reforms to be revealed during next month's Third Plenum: "At Tuesday’s meeting, Xi reportedly stressed that, to turn more SOEs into world-class...

via @scmpnewssc.mp/0n6vh?utm_sour… 2/4
companies, a modern corporate governance structure must be established to solidify the party’s leadership but also promote clear-cut responsibilities and a separation of government functions from corporate operations to foster effective management."
Jun 12 5 tweets 1 min read
An article in Bloomberg argues that because US trade sanctions are causing direct trade between the US and China to decline, the US economy is unlikely to benefit from the disinflationary impact of Chinese deflation.

bloomberg.com/news/articles/… 2/5
This might make sense if we think of the global economy as a series of discrete, incremental transactions operating in isolated markets, but it makes very little sense if we understand the economy systemically and through the balance of payments.
Jun 10 10 tweets 2 min read
This article gets a few things right about growing concern about the global use of the US dollar but manages to be incredibly confused about why foreigners use the dollar and how this affects the US. There are two quotes I found especially silly.

reuters.com/markets/curren… 2/10
"Consternation is growing, both at home and abroad, about the consequences of U.S. hubris. But despite trying, no one so far has been able to find a credible alternative or expects one to emerge anytime soon, and they have partly themselves to blame."
Jun 9 4 tweets 2 min read
The IMF is warning the US on its ballooning debt. But to address its debt, the US must address two other things. The US suffers from extremely high income inequality and is forced to absorb nearly half the excess savings of the rest of the world.

ft.com/content/134cc7… 2/4
As a result, the US economy must absorb an enormous amount of savings. One way could be through higher US investment, but the amounts are too great, and anyway the high savings it must absorb is simply the flip side of weak demand.

Jun 8 14 tweets 3 min read
This is a pretty silly statement, and I am surprised that the World Bank doesn't understand why. The PPP adjustment is an attempt to make the economies of different countries more comparable by adjusting for difference in prices. 2/14
The adjustment starts with a country's GDP, and then tries to calculate the difference in prices between that country and the US for a similar basket of goods, and then adjusts that country's reported GDP by the price difference.

Sounds reasonable, right?
Jun 4 7 tweets 2 min read
Good Reuters article on the pace of adjustment in the Chinese property sector. Although it will continue for a while longer, much of the contraction in property construction and development may have...

reuters.com/world/china/ch… 2/7
already occurred, and we may even eventually see a partial recovery in the top cities, although it is unlikely that we will ever see recovery in the sector in most of China's cities. There are too many empty buildings and too limited population growth.
Jun 4 7 tweets 2 min read
It is pretty clear to me that global trade conflict is likely only to get worse, mainly because the two sides cannot even agree on what the disagreement is about. According to Bloomberg, China's Commerce Minister...

bloomberg.com/news/articles/… 2/7
Wang Wentao said in Spain that "the EU has used overcapacity, unfair competition and 'other false narratives' to launch investigations into Chinese EVs, railway, solar, medical equipment and other sectors, increasing the risk of China-EU frictions."
Jun 3 8 tweets 2 min read
Cambridge's Antara Haldar looks back at the 35-year history of the "Washington Consensus" development model to assess its success. Her conclusion: "One clear takeaway is that its one-size-fits-all approach often...

prosyn.org/jcxWD1d 2/8
amplified macroeconomic events and reduced developing economies to sites for sweatshops. These countries ended up in a race to the bottom as they tried to outcompete each other on labor costs."
Jun 3 9 tweets 2 min read
Bloomberg: "China’s whole economic model is not sustainable because of “vastly inadequate” domestic spending and a lack of investment opportunities, according to Paul Krugman. Beijing should be supporting demand not more production.

via @marketsbloomberg.com/news/articles/… 2/9
Krugman is right in his analysis, of course, although he finds it "bizarre" that China’s leaders are unwilling to use government spending to support consumer demand rather than more production.

But I don't think it is so bizarre.
Jun 3 6 tweets 2 min read
Good Bloomberg article on PBoC tools to support the housing market. Because the problem excess housing isn't a financing issue, the problem with these tools is that they don't really solve the associated debt problem but rather reassign it.

bloomberg.com/news/articles/… 2/6
They mostly shift the debt from the developers to the PBoC or to local government entities. That means the cost of China's massive overbuilding won't have been been resolved but rather will be embedded in the balance sheets of the PBoC, banks or local governments.
May 31 6 tweets 2 min read
According to the Peterson Institute's Arvind Subramanian in an article today: "If there is any truth to the adage that China is the only country in history with a comparative advantage in every industry, then targeting...

afr.com/policy/economy… 2/6
the world’s most efficient exporter and supplier with protectionist measures could create lucrative opportunities for its competitors."

This strikes me as a bizarre thing to say.
May 30 8 tweets 2 min read
Good FT article on currency pressures facing the PBoC. The negative RMB carry versus USD and other currencies, combined with very limited RMB upside, makes it rational for anyone who can short the RMB to do so.

via @ftft.com/content/385814… 2/8
This of course puts substantial downward pressure on the RMB, but the PBoC is very reluctant to see the RMB depreciate. They are reluctant partly for reasons of international prestige, with Xi Jinping calling earlier this year for a strong RMB policy.
May 29 4 tweets 1 min read
Andreas Kluth argues that for the US to remain the world leader, it must maintain a global trading system that requires surging US debt to maintain global demand and a continued decline in the role of manufacturing in its economy.

via @opinionbloomberg.com/opinion/articl… 2/4
This was the old Nixon-Kissinger line in the early 1970s. While their economic advisors warned repeatedly about policies that undermined the US economy, they countered by arguing that the economic trade-off was worth the geopolitical leadership.
May 29 4 tweets 1 min read
The point that Setser is making is an important point, although it should also be an obvious one. China has certainly benefitted from technological convergence, but there is no reason why technological convergence must lead to lagging imports. 2/4
It's strange to argue that technological convergence is characterized by rising trade surpluses, as if the point of exports and rising productivity were to accumulate foreign claims rather than to increase domestic welfare.
May 28 6 tweets 1 min read
PKU's Huang Yiping proposes that Beijing should take a page from the Marshall Plan and make massive loans to developing countries to expedite their green transition. This would help China digest its industrial overcapacity and promote use of the RMB.

sc.mp/zylvz?utm_sour… 2/6
This is actually a good idea. China seems incapable of resolving its problems of overcapacity and excess savings, at least within a reasonable time frame, and much of the rest of the world refuses to accommodate China's inability to do so.