Rebalancing, wealth transfers, and the growth of Chinese debt | Michael Pettis

Michael Pettis summarizes China’s debt dilemna:

This, I think, is really the key point. There is no way Beijing can address the debt without a sharp drop in GDP growth, but as unwilling as Beijing may be to see much lower growth, it doesn’t have any other option. It must choose either much lower but manageable growth today or a chaotic decline in growth tomorrow.

…..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.

Xi Jinping doesn’t have the short-term focus of most developed economies, where leaders are primarily concerned with the next election, but even he has failed to grasp the nettle. Cutting GDP growth may fuel greater political instability but this is a price China has to pay.

Source: Rebalancing, wealth transfers, and the growth of Chinese debt | Michael Pettis’ CHINA FINANCIAL MARKETS

4 Replies to “Rebalancing, wealth transfers, and the growth of Chinese debt | Michael Pettis”

  1. Wow! What’s really interesting, and possibly worthy of a PhD, is how many different ways economic experts can say don’t borrow more money than you can pay off. Truly amazing.

  2. what is`nt mentioned is the 3rd way – back ya paper currency with gold, bing – balance sheet restored.

  3. With full respect to jo and frankaquinO (who are both genuine people of substance) I say:
    It’s a ‘no worries’ situation.
    China, only has to follow us Aussies.
    Our strategy is to (continually) increase the spending of tax payers’ money.
    To manage this we simply changed our debt ceiling requirements. We just changed the number.
    Of course, additional tax-payer funded PhD students (to analyse this) will be required. Anyway, she’ll be right – the next generation can deal with it.

    1. Haha – spot on Big Lucy. My Super does that every day (although the number changes downward mostly). Paraphrasing Kurt Vonnegut: But the planet…was as moist and nourishing as the day before the crisis. All that had changed was people’s opinion of the place.”
      Full marks to Colin for this blog – it gives me a respectable place to rant (occasionally) and learn something (mostly).

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