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Michael Pettis

lines on the record: 96
first: 2024-07-18
most recent: 2024-07-18
sittings or episodes: 1
sources: podcast

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“Surplus and I may temporarily have a deficit, but the deficit causes a contraction in my economy until I adjust and your surplus causes an expansion in your economy until you adjust. But Kane said when governments prevent the expansion in the surplus economy, then all you get is the contraction and the deficit economy. So that kind of trade is always putting downward pressure on demand. And the only way to resolve it is with rising debt. The other type of trade puts upward pressure on supply and so demand follows. That's the big difference between these two types of trades. Now, I know this gets a little bit complicated, but did what I say make sense or do I need to try to explain part of it again?”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Get more and more imports forever unit of exports, they became exporters of weak domestic demand. I export not because I want to import, I export because I can't sell the stuff at home. And that's a very, very different environment. And as I said, that forces your weak domestic demand, which should cause a rise in unemployment at home. It forces that weak domestic demand onto your trade partners. So now your trade partners deal with the options of rising unemployment, rising household debt, or rising fiscal deficit. It's a way of getting rid of that problem. But what it does, and Keynes was very explicit about this at Bretton Woods in 1944, what it does is it puts permanent downward pressure on demand because normally in a well-functioning world, you may temporarily have a”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Global production goes up, right? That's in a world without trade imbalances because comparative advantage can only be expressed in the exchange of goods, not in the production. If all you do is produce shoes, that's not comparative advantage. You have to produce them against my fish production. And it's in the exchange that we realize the value of comparative advantage. But in our world and in the world of the 1930s, that's not what happened. What happened is that in order to boost employment, certain countries subsidize manufacturing so that it would grow more quickly than otherwise. But because those subsidies came at the expense of the household sector, it reduced demand. So instead of being efficient exporters, which means that”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Well, the key thing is what the purpose of exports are. So you remember when you read in school about comparative advantage, in fact, you were giving me the comparative advantage argument, you could be better in producing both fish and shoes, but better than me. But if the gap in shoes is greater than the gap in fish production, then basically you should produce shoes and I should produce fish and we should use our excess to exchange. In that case, you're producing more shoes than you need precisely because you want to import the fish that you need. And I'm producing more fish than I need because I want to import the shoes that you need. And in that case, comparative advantage shifts production to where it's most efficient. And so presumably total global.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“From the 1960s to the present, this idea that trade is always good regardless of if countries are largely running very large deficits, that was the main view. And since then, U.S. manufacturing employment has gone down a lot as things are no longer built in America. They are built elsewhere. So it peaked at 20 million people worked in manufacturing in 1980. It bottomed in 2009 at 11 million. Now it's closer to 13 million. So employment in manufacturing has gone up as a percentage of the labor force. Maybe it still is lower. But how did we find ourselves, Michael, where the tide is turning? And I might say, you know, former president Trump with his election in 2015 talking about how China is killing us on trade, he definitely played a role and the Democrats and Biden responded in turn. I think it is now something of a consensus among Democrats and Republicans that to let China”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Let me interrupt you there, Jack. Yes. You're absolutely right. On the condition that you exchange your extra shoes for my extra fish, right? In other words, if the reason you export is to import, trade is almost unquestionably good. There can be problems with the division of the benefits, but generally global GDP goes up. But that's not what's happening. What's happening is that you are trading shoes, but you are not importing fish. So all that's happened is that my fish production hasn't gone up.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so it says 20 years ago, I think a lot of economists, definitely the mainstream opinion, would not have agreed with a lot of what you're saying. There was a consensus that trade is always good. As I learned in economics 101, if I make shoes and you make fish, you're great at making fish. I'm great at making shoes and we trade. That's a net benefit. And that philosophy.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Is either you have to replace it with more household debt or you have to let unemployment rise. And that puts the US, I would argue, in a very tough position. And it's why I think both the Trump administration and the Biden administration have been so determined to change those dynamics.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“the US runs a current account deficit because it has a high fiscal deficit, has it backwards? That can be true under certain conditions. But when you enumerate those conditions, you quickly see that cannot be the case today in the US. So the causality is backwards. Capital inflows into the US force the US to choose among these options and often enough it will choose a higher fiscal deficit. If it lowers the fiscal deficit, that won't lower the trade deficit because to lower the trade deficit, it would have to lower net capital inflows into the US. And most people would tell you that if the U.S. fiscal deficit goes down, even more foreign money will flow into the U.S. So the trade deficit will actually widen not contract. What will happen if you reduce the fiscal deficit?”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“So, when Americans borrow to consume the savings rate goes down that way, instead of buying unemployment. And then the third main way is that Washington can decide to expand the fiscal deficit in order to prevent unemployment from going up. And the fiscal deficit, of course, is negative savings. So once again, the U.S. adjusts. So what I would argue is that because of these inflows into the US, and by the way, it's not just a U.S. problem. We saw this in Spain, Italy, and Greece at the beginning of this century. German inflows had exactly the same impact. Those countries had to respond like the US, either with higher unemployment, higher household debt or a higher fiscal deficit, and not surprisingly, it generally chooses higher household debt or higher fiscal deficit. So the argument that”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Go through a long pedantic thing, it's in my last book, if anyone's interested. But there are generally three ways savings will go down. One way is because the inflows are the obverse of a US trade deficit is that American manufacturers sell less to Americans because they're buying more from foreigners. And so they fire workers. in which case unemployment goes up. And as you know, an unemployed worker has a negative savings rate. So that's what causes American savings to go down. Now, of course, Washington doesn't like that to happen. So there are broadly two ways they can respond. One, the Fed worried about rising unemployment can lower interest rate to encourage American households to borrow and to consume. Borrowing is negative savings.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“So, when foreign capital came into the US, American investment went up. But that's no longer the case. American businesses aren't yelling, you know, we desperately want to invest, but we simply can't access cheap enough capital. On the contrary, American businesses are sitting on huge pools of cash, which they're not investing. And when they do invest it, it's not investing. It's buying back their own shares or buying shares in other companies. Clearly, American businesses don't believe they need to increase investment. So that means when foreign money comes into the US, American investment is unlikely to go up. And you can look at the data. It doesn't. But you still must see the gap. And so the gap is generally created by a reduction in U.S. savings. And I don't want to, you know.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Money comes into the US by definition American investment is higher than American savings. So if you believe that foreigners invest in the US because they're smuggling drug money, they're investing central bank reserves, they're diversifying their savings, they're speculating on debt, whatever the reasons are, then what has to happen is that we have to see a gap between American savings and American investment. By definition, investment must be higher than savings. So what happens when foreign money comes into the US? Does investment go up or does savings go down? We don't know. So we have to look at other evidence. And what I would argue is that there have been periods in American history, like the 19th century when Americans wanted to invest more than they could afford to out of their own savings.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Why they're going to invest in the US and how much they're going to invest in the US. And the problem is because of the balance of payments always balances, whether Americans need foreign capital and pull it in or whether foreigners need to invest in the US and push it in in either case, you're going to see a balance between savings and investment. The US economy will have a gap between savings and investment.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“When money flows into the US, the American centric view says money must flow into the US because US savings are low and we need to import foreign capital to finance our very large trade deficit. And that's certainly one way of looking at it. But before I move to China, I ran trading and capital markets desks on Wall Street. And I can tell you, if you spend a lot of time in the markets, you know that a Scottish investment fund, the manager of a Scottish investment fund, doesn't wake up in the morning and pick up the newspaper and say, oh, my dear, the Americans are, their savings rate has gone down. I better invest some money in the US to help them out. That's not what happens. Foreigners decide completely independently.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, you know, this is so much easier to explain to non-Americans than to Americans. And I think the reason is because, you know, to be a little reverent here, there are broadly, I would argue, three groups of Americans. One large group of American Americans believe that everything good that happens in the US and in the world is the direct result of American policy decisions. Every bad thing in the US and the world is driven by American policy decisions. And then there's a very small group, which includes people like me that argue actually a lot of things happen that are not caused by the United States. The rest of the world does have agency. The US is 5% of global population.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“That is to say, the capital inflows that the U.S. experiences are the direct result of trade deficits with the rest of the world, particularly China, and that China's trade surplus with the US is America's capital surplus with the US. In other words, America imports a lot more than it exports, and that difference is flooded back into the US through the capital account, through the US financial markets, which are very open to the rest of the world.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Wrote about it. She coined the phrase beggar thy neighbor. She actually coined beggar my neighbor, but it became beggar thy neighbor as a way of describing this process. If you have weak domestic demand and you have to resolve it domestically and you can't raise demand quickly enough, then you have to reduce supply, which means a rise in unemployment. The alternative is to run trade surpluses. So she called it exporting unemployment. And basically that's what we are. Surplus countries are exporting unemployment and deficit countries have to respond either with higher unemployment or higher debt. And of course nobody wants to do that. The US has played the key role there. And if the US starts withdrawing from that world, it creates a real global imbalance problem.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Other large economies. And basically, what are the large economies? There is the EU. There's India, which has made it very clear it's not going to accept Chinese manufacturing. Japan, which also is determined to protect its manufacturing sector. And then the developing world. So, you know, each of those areas are now very focused on what the US does, because if the US takes steps to reduce its deficit, then that puts tremendously painful pressure on the surplus countries, or it forces the rest of the world to absorb the costs that the US has been absorbing. You know, what I try to remind people is that this is nothing new. Back in the 1930s, we solved the same process, the famous British economist Joan Rob.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“November, it'll probably continue that the US is making really major efforts to sort of rebalance its own economy, to end its role of the great absorber of last resort of global excess savings or consumer of last resort. It's the same thing. Now, if it does that, that puts enormous pressure on the rest of the world. And the European Union in particular is very worried about this. Because if the US reduces its absorption of excess production globally, not just Chinese, but global. And by the way, so far the US isn't. The U.S. deficits actually growing. But if it succeeds in capping its deficit and bringing it down, then that means that surplus countries are going to be forced to redirect their surpluses into”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“I know it's politically very popular to attribute most of these problems to China, but China is not the only country that is exporting its domestic demand deficiencies. Japan has, although to a much lesser extent than in the past, Germany is, South Korea, a number of other countries are. That puts a particular burden on the United States, because as you know, the US absorbs roughly half of all the trade surpluses in the world. And that's necessary if these, I'm sorry, yeah, roughly have to trade surpluses through an enormous trade deficit. And the U.S. trade deficit is necessary if the surplus countries are going to maintain their surpluses. Now, what seems to be happening, it began under Trump and it continued under Biden, and no matter who wins in...”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and I think by now it's almost a clich ⁇. Sort of everybody is talking about the Japanese model of adjustment as what is likely to happen in the case of China. And so, yeah, it continues to be the base case. China could escape the Japan trap if it were to Many people say that's impossible because local governments are bankrupt, but local governments are not bankrupt. They're unable to service their debt because they have severe cash flow problems, but they own tons of assets. So that's, in theory, a way China can escape the Japan trap. There's no evidence so far that they're going to do it, but otherwise I think the options are either a long, slow adjustment or, you know, God forbid, a very rapid brutal adjustment.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Earlier, you referenced Japan, which, like China, had an investment driven growth model, which peaked into a financial bubble that peaked in the early 1990s. And there was a very long period of very slow growth, a recession, and real estate prices collapsed over a very long period time in Japan. I believe when we spoke last year, that was your base case. You thought that China would really struggle to move from an investment-driven model to a consumption-driven model. And that what we saw in Japan over the past 30 years might be a blueprint for China. Is that still your base case?”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Well, total debt is continuing to rise, and part of the reason Beijing has been issuing bonds is to help get over disruptive adjustments at the local government level. You have to remember that a very large number of local governments, some might say the majority, are unable to service their debt. So they face a problem because if they can't service the debt, that puts enormous pressure on the banking system, which would then have to be bailed out. So one of the ways of dealing with that is temporary borrowings, or I should say occasional borrowings by Beijing, which are then transferred to local governments to help them service debt as they try to work out their problems. We might hear during the third plenum, which is taking place as we speak, that they will restructure some of this debt to remove pressure on local governments, et cetera. But basically, local government...”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Thought working. There have been a lot of these small consumer subsidies that have had almost no impact. In fact, this year consumption grew more slowly than GDP, in spite of all of this talk about boosting consumption. So my guess is, and I should state that most analysts disagree with me, although three months ago, I think they disagreed even more. But my guess is that probably in the third quarter or early in the fourth quarter, they're going to do something that they said they wouldn't do, which is to engineer a large fiscal borrowing and use the proceeds to transfer to the household sector. That will boost consumption in the short term. That'll be great for business investment when you talk to Chinese businesses. They'll tell you straight out. The problem is there's no domestic demand. The only thing is that it's not a sustainable.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“At some point, they're probably going to reach a thousand dollars. But, you know, the argument there is that for a hundred dollar transfer, we can increase consumption by $1,000. Great. What a great program. But of course, that's not true. If you weren't going to buy a car, and because of this $100 subsidy that I'm giving you, you go out and buy a thousand dollar car. You still have a budget constraint, right? You still make a certain amount of money. and you have to spend within your budget. So you spend more than expected on cars, $900 more in this case, you'll probably spend $900 less on haircuts or restaurant meals or shoes or whatever. So your total consumption will go up roughly by the $100 subsidy, not by the amount of car purchases. And so they're learning that that's...”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“It's very hard to know what people in Jungnanhai are thinking. It's very hard to get information from them. But when you speak to economists in China, including a number of people who have been or are policy advisors, I think there's a widespread recognition of how difficult this problem is. So there have been many proposals about ways to boost consumption. The problem is they all try to do it on the cheap. So for example, people say, well, if you have a car, I will give you $100 if you turn in that car for a new model that costs $1,000. Obviously cars don't cost $1,000, but I'm trying to keep the numbers simple.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“So, the reason that Chinese manufacturing is so competitive, why they can produce goods that are so cheap, cheaper than the rest of the world has a lot to do with what you're saying is it has a lot to do with why the reason Chinese consumption and demand is so weak. So if China wanted to boost consumption, that could come at the expense of its export driven model of its very strong and competitive manufacturing. So it appears that Beijing is at a crossroads. Does it Stimulate domestic demand at the expense of its export manufacturers, or does it continue to subsidize all the policies you mentioned? Its export manufacturers? How is the Chinese Communist Party and Xi looking at that dilemma?”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“It could have pretty adverse consequences in the short term, even though it would be positive in the long term. So I would argue that that's why it's so difficult to rebalance the economy. It's not about giving households more money. It's about taking resources from some sector of the economy and passing them on to the household sector. And it's the taking part that's so hard.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“And it's compounded by the fact that when you have this kind of growth model, you tend to have a very high manufacturing share of GDP, right? So you look at Japan at its peak. It was about, manufacturing was about 27% of the Japanese economy. In China, it's about 28% of the Chinese economy. Globally, it's around 15% of the global economy. It's 11% of the US economy. Not surprisingly, manufacturing migrated from countries in which manufacturers were forced to subsidize consumers. Two countries in which consumers were forced to subsidize manufacture. And so that created a bit of an Achilles heel because manufacturing is so important to the Chinese economy that if you undermine”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“That investment is so high and that manufacturing is so competitive, but it's also because of these transfers that the household share of GDP is so low and consumption is so low. So if you want to solve the problem, you have to reverse the transfers. But if you do, what happens to a manufacturing sector, that's for the last 20 to 30 years, been built around these transfers. Presumably, they become much less competitive and they start.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Really true. It's competitive because there have been a whole series of transfers, direct transfers, restrictions on wage growth, very low interest rates which benefit borrowers at the expense of savers, an undervalued currency which benefits manufacturers at the expense of households. All of these things have subsidized the manufacturing sector in China at the expense of the household sector. So the part that I think many people don't realize is Chinese manufacturing competitiveness is not a separate thing from China's very weak domestic demand, from its very low consumption share of GDP. One is the obverse of the other. It's because of these transfers from the household sector to the manufacturing sector and to the government sector.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“The reliance on the trade surplus, all the right things. And yet here we are 38 years later. And it's still an open question as to whether or not Japan has finally pulled it off. And what that should tell us is that it's remarkably difficult to rebalance the economy. The quick way to do it, the way the US did it in the 1930s, for example, is with a really brutal contraction and a financial crisis. Clearly, China doesn't want to do that. The alternative has been the historical precedent suggests it's very difficult to do so. And here's one possible reason I would suggest, and that is Chinese manufacturing is globally incredibly competitive. Now, you'll often hear that it's competitive because manufacturers are especially efficient, et cetera, et cetera. And no, that's not.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“More bluntly which sector of the economy pays for that. Basically, it's going to be businesses, probably not a good idea because businesses are the engine of economic growth or the local governments or Beijing. And that becomes part of a conflict within China between Beijing and the local governments over the distribution of power. Now, one of the things that you have to remember is that this is not a Chinese problem that we've seen this before. Japan had a similar problem, not to the extent that China did, but in the 1980s it faced many of the same imbalances. And in 1986, Japan issued something called the Macawa Commission Report, in which they said all the things that they had to do raise the consumption share of GDP, raise the household income share, reduce investment, reduce.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“So basically, one of the ways you can divide the economy is you can say all of GDP goes either to households and households, you can say the rich and ordinary, or to foreigners, but foreigners are too small to matter, so you can ignore them, or to businesses, or to the government. And government in China, there are two governments. There's Beijing and there are the local governments. So when you talk about increasing sustainably the consumption share of GDP, you're talking about increasing the household share of GDP. But here's the problem. If my share goes up by definition, your share must go down. It's easy to figure out how to get me a higher share. The hard part is figuring out how do you allocate the cost of that higher share, or to put it.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, you would think so because everybody likes to consume, give them money, they're not going to complain. So there are different ways you could boost consumption. You could boost it temporarily in the short term by having government borrow Chinese academics are recommending anywhere between $1 trillion and three trillion RM&B. $3 trillion would be about 2% of China's GDP. And they're recommending that the government borrow that and distribute it directly or indirectly to the household sector. Many ways of doing it. That would work. The problem is that if you're trying to address the debt problem, then resolving consumption by increasing debt is unsustainable. You can do it a couple of times, but you can't do it forever. The real way to increase the consumption share of GDP is to increase the household income share.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the thing is that 96% of the growth in China, 95% is consumption and investment. And that's true in most countries. It's mostly consumption and investment. Net exports, the trade surplus is an additional form of demand, but it's too small really to drive the Chinese economy. Although I have to say that this year it was a very important component of overall growth. But ultimately, a country as large as China cannot depend on net exports to drive growth. So they're stuck. It's either investment or consumption. And as you pointed out, they would love to raise consumption, but it's incredibly difficult to do so. And so they have to keep investment growth rates very high if they want to achieve the high GDP growth target.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“By without having a real estate bubble, by lowering the investment in construction and building. And GDP gross semantics product economic growth is just for our audience, investment plus consumption plus the government plus net exports. So if it's a positive, if China exports as it does more than it imports and it's a minus for the US, we import more than we export for GDP. So China can either if investment falls in China or the rate of growth of investment falls in China, it can either have the total GDP go down, total growth rate of GDP go down, which it does not want. It could have consumption go up, which it desperately wants, but as you have pointed out, is very difficult. Or it does have this third toggle of it could just export more to the rest of the world, which China has been doing for decades. But are you saying it's increasing?”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“The Chinese growth miracle from the 1980s to the 2010s was, as you said, investment driven model, which meant building a lot of infrastructure and building a lot of buildings. But that resulted in a property bubble that the Chinese government ultimately decided was.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Is increasingly unlikely to do so. So the problems we talked about the last time we were here have all as expected been exacerbated, gotten worse. Growth continues high, but it's really driven by excess investment and larger and larger trade surpluses. And the consumption side of growth continues to contract. So China is facing worse imbalances than ever and very difficult choices in making the necessary adjustment.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Consumption. Now, if China were a small country, that would be fine. Most people wouldn't notice it. But when you're the second largest economy in the world, that 17% of global GDP, that kind of shift requires a pretty severe accommodation from the rest of the world. And that means the rest of the world has to agree to reduce its manufacturing share and increase its consumption share in order to accommodate China. Now, if the rest of the world had been very friendly, they wouldn't have done that. The fact that we're in a very unfriendly world made it even clear that that wasn't going to happen. So what we've seen in China is that the manufacturing share has grown, and that's shown up in the form of a growing trade surplus, which the rest of the world must absorb.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“They face the problem if you slow down investment, then you need consumption to surge or else GDP growth drops. And what they decided to do was to shift all of this investment out of the property sector and into manufacturing. Now, this seemed like a good strategy, but there was a big problem with that, and that is that China is 17% of the world. It accounts for only 13% of global consumption, but it accounts for 31% of global manufacturing. And by shifting investment out of property and into the manufacturing sector, that implicitly meant that the Chinese share of global manufacturing was going to grow relative to its share of global GDP and even more so relative to its share of global”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“And you rein in investment, then one of two things must happen. Either consumption growth must pick up speed, very unlikely when you're reining in investment, or GDP growth must drop. And so China was facing a problem. They were trying to rein in investment in the property sector, and they were becoming increasingly worried about investment in infrastructure. I mentioned 2021 is when they reigned in the property sector. 2022 is when we started getting the first formal recognition that many of the provinces, in fact, most of them are effectively bankrupt, unable to service their debt without help. So they were trying to slow down the investment in infrastructure that was generating all of this local government debt.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Low investing countries, which tend to be advanced economies or slowly growing developing economies, tend to invest 18, 19, 20 percent of GDP and high investment economies, which tend to be very rapidly growing developing countries tend to invest around 32, 33 percent of GDP. Well, in China, investment is 43% of GDP, and it used to be as high as 47% of GDP. There's really unprecedented number. So what that meant is that investment far more than consumption was driving growth. which is what we discussed last time. And so as investment became increasingly non-productive, including in the property sector, you had to rein it in. But there was always a big problem when investment is such an important driver of growth.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“Frankly, a bubble one in which Beijing had tried many times to rein in, but as the cost of reigning it in became clear they always backed away. But finally in 2021, they didn't back away and they put a serious constraint on continued growth in the real estate sector. You know, that happened very late, but it was necessary. It was good that they did it and didn't postpone any longer. But there is a big problem because The real estate sector accounted for roughly one-third of the total investment in the Chinese economy. And remember, what characterizes the Chinese economy is that its disproportionately driven by investment. So, you know, globally, investment is about 25% of GDP and consumption is about 75%. It varies a bit. Has been pretty steady at that rate during the century. Not all countries have the same levels of investment.”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT
“As we discussed, Jack, the problem with the investment driven growth model, there's nothing fundamentally wrong with it, but it makes a big difference whether your economy is seriously underinvested, which China was in the 80s and 90s, or whether it's no longer underinvested, in which case very high investment rates are increasingly likely to result in nonproductive investment, in which case you should see debt starting to grow much faster than GDP. And as we discussed last time, that's been happening for quite a long time. You could argue that that's been happening since 2007-2008. What's changed in recent years is that there is a much greater recognition of what the problems are, what the imbalances are, and what the consequences are. Was a very important year because after years of this rising real estate prices”
2024-07-18 · Forward Guidance · China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle · IDENTIFIED FROM THE TRANSCRIPT