If we don’t understand both sides of China’s balance sheet, we understand neither | Michael Pettis

From Michael Pettis’ OpEd in the Wall St Journal:

History suggests that developing countries that have experienced growth “miracles” tend to develop risky financial systems and unstable national balance sheets. The longer the miracle, the greater the tendency. That’s because in periods of rapid growth, riskier institutions do well. Soon balance sheets across the economy incorporate similar types of risk.

….Over time, this means the entire financial system is built around the same set of optimistic expectations. But when growth slows, balance sheets that did well during expansionary phases will now systematically fall short of expectations, and their disappointing performance will further reinforce the economic deceleration. This is when it suddenly becomes costlier to refinance the gap, and the practice of mismatching assets and liabilities causes debt, not profits, to rise.

Read more at If we don’t understand both sides of China’s balance sheet, we understand neither | Michael Pettis’ CHINA FINANCIAL MARKETS