I have been arguing for a while that as long as the Chinese government retains its capacity to raise debt we are not going to see a sharp slowdown in economic growth – at least until 2013. Any indication that the economy is slowing too quickly will be met with a relaxation of credit controls, and the concomitant rise in investment will spur growth.
On July 13, under the heading “National Economy Maintained Steady and Fast Growth”, the National Bureau of Statistics released more data on China’s economy.
According to the preliminary estimation, the gross domestic product (GDP) of China was 20,445.9 billion yuan for the first half of this year, a year-on-year increase of 9.6 percent at comparable prices. Specifically, the growth of the first quarter was 9.7 percent, and 9.5 percent for the second quarter…The gross domestic product of the second quarter of 2011 went up by 2.2 percent on a quarterly basis.
Quarter-on-quarter growth of 2.2% means that on an annualized basis the Chinese economy grew 9.1% in the second quarter. The market was expecting slightly lower growth, but I think few people expected the reported numbers to come in below 9%. We are well on track to completing the year with GDP growth rates of around or above 9%.
Why was growth so high? I think the obvious answer is that the main drivers of growth – increases in investment – stayed high:
In the first half of this year, the investment in fixed assets (excluding rural households) was 12,456.7 billion yuan, a year-on-year growth of 25.6 percent.In the first half of 2011, the investment in real estate development was 2,625.0 billion yuan, a year-on-year growth of 32.9 percent.
I think the main takeaway for the market was that we are not going to have a hard landing, as many expected. To tell the truth, I am not sure what people mean by a hard landing, but I am pretty sure that unless inflation continues to rise strongly for the next several months – which I doubt will happen, especially since June inflation seems largely to have been limited to pork prices – we are not likely to see any dramatic slowdown in growth this year or next.
Not everyone agrees, and perhaps many are still expecting a sharper slowdown. Here is what the Financial Times had to say when the GDP numbers were released:
With Beijing trying since last year to limit bank lending, cool the scorching real estate market and slow rapid price increases, most economists had expected significantly lower GDP growth in the second quarter than the 9.7 per cent year-on-year increase in the first three months.
The stronger-than-expected second quarter growth of 9.5 per cent was boosted by growth in industrial production of 15.1 per cent from a year earlier in June, up from 13.3 per cent growth in May and the fastest pace in almost a year.
June inflation came in at a higher-than-expected 6.4%, year on year. According to the July 11 release:
In June, the consumer price index went up by 6.4 percent year-on-year. The prices grew by 6.2 percent in cities and 7.0 percent in rural areas. The food prices went up by 14.4 percent while the non-food prices increased by 3.0 percent. The prices of consumer goods went up by 7.4 percent and the prices of services grew by 4.0 percent. In June, the month-on-month change of consumer prices was up by 0.3 percent. Of which, prices in cities went up by 0.2 percent and that in rural areas rose by 0.4 percent. The food prices grew by 0.9 percent while the non-food prices maintained the same as last month. The prices of consumer goods rose by 0.4 percent, and the prices of services showed no change of growth.
This suggests that once we can get food prices – especially pork, which was up 57.1% year on year – to stabilize, the period of rising inflation may be behind us. Since I wrote this blog entry for my newsletter, ten days ago, I see that in the last week pork prices have actually declined.
Restructuring?
In that case there will be tremendous pressure to loosen monetary and credit conditions, especially for the ailing SMEs, who are facing the double whammy of rising wages and rising borrowing costs (only for marginal borrowers – SOEs, local governments and big borrowers are seeing rapidly declining borrowing costs in real terms). They are the most efficient part of the economy, but unfortunately they are getting squeezed to the point where the rise in bankruptcies has created real alarm.
Not everyone sees pressure on the SMEs as a problem. On Thursday the Financial Times had this article:
As China seeks to rein in stubbornly high inflation, measures to tighten borrowing have prompted fears that the country’s small and medium-sized enterprises (SMEs) will be hit hard, as credit is channelled instead to large state-backed companies.
But the real picture is more complex. Rather than facing a widespread credit squeeze, the SME sector is undergoing a painful process of restructuring. Capital is being funnelled towards high-tech and green energy-related companies at the expense of traditional low-end manufacturers.
The article goes on to argue that problems in the SME sector are part of an overall push to increase productivity, and focuses on the town of Wenzhou, widely considered the heart of the SME sector:
Mr Zhou says at least 20 per cent of Wenzhou’s SMEs – there are 360,000 in the city – have already cut back operations or closed their doors this year. State media have carried reports of cash-strapped SMEs borrowing from underground lenders at annualised rates of 60 per cent.
But for all the alarmist talk, Wenzhou is hardly on the brink of collapse or, for that matter, about to run out of cash. Instead, interviews with local factory managers, investors and bankers reveal a city in the midst of fundamental change in what it produces, with the government prodding companies to make more sophisticated products as rising wages undermine the low-cost model of manufacturing. A lack of financing, they say, is a symptom and not a cause of the troubles facing traditional industries.
I am not sure I would be so optimistic. As Chinese growth slows down, as it inevitably must and as even the government has warned will happen, the Chinese economy needs to become more labor intensive, and not more capital intensive. It is already too capital intensive, mainly because the cost of capital has been pushed down to extraordinarily low levels. Channeling more money from the household sector to subsidize more capital intensive industries – in sectors where China’s only comparative advantage seems to be its willingness to shovel losses onto the household sector – is not going to increase national wealth, nor increase overall productivity, and it certainly is not going to help absorb labor as the economy slows.
Debt limits
I would argue that we urgently need to see a shift in the economy away from infrastructure, SOEs and real estate towards service industries and SMEs, especially those that are labor intensive. Until we do it is pretty meaningless to talk about a real adjustment in the engines of economic growth.
China has no choice but to adjust, but as long as it is easy to borrow – and I think we have at least four or five more years during which time debt levels can continue rising before we hit crisis levels – the adjustment problem can always be put off a little longer. That is why we are unlikely to get a real sharp slowdown in growth for at least another year or two.
But what to do about rising debt levels? This is the real problem China is facing now, and my biggest concern is that policymakers are buying into the argument that China can “grow out” of the current debt burden, just as it did after the banking crisis of a decade ago. In other words, if we keep investment levels high, we can keep growth high, in which case we can safely ignore the huge pile of debt, just as we were able to ignore the huge pile of NPLs that the banks had accumulated in the 1990s.
But no, no, no! This is the worst thing policymakers can do. Contrary to popular opinion, China did not grow its way out of the previous debt crisis. What happened was very different. By keeping interests rate incredibly low, China was able to do two things.
First, very low interest rates presented a huge subsidy for borrowers, so it allowed them to borrow and invest in every conceivable project, whether of not it made economic sense. Of course all this investment created growth in the present, but because investment was misallocated, it simply meant that in future years growth would be much lower. To that extent, we didn’t have real growth – we simply overstated current growth rates in exchange for being forced to write the growth off in the future. Over the next few years we are going to pay for that misallocated investment in the form of slower growth. That means that much of the growth that allowed us to “grow” out of the debt problem simply involved pushing the real cost of the debt crisis forward.
Second, very low interest rates effectively created substantial debt forgiveness for the borrowers, so again even with the artificially high growth, China did not “grow out” of its debt. It just wrote most of the debt off, at the expense of course of depositors. This is why consumption collapsed during this period as a share of GDP.
For this reason the idea that we can “grow” out of the debt problem once again by keeping investment high is wrong. First, it would only increase capital misallocation and debt levels, and would require even lower growth in the future. We can’t keep pushing the cost off into the future, as attractive an option as that always seems. Second it would put unbearable pressure on household income and consumption, and so ensure that the one thing China needs above all – a rapid rise in household consumption – is all but impossible.
This is an abbreviated version of the newsletter that went out ten days ago. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at chinfinpettis@yahoo.com, stating your affiliation, please. Investors who want to buy a subscription should write to me, also at that address.
“I would argue that we urgently need to see a shift in the economy away from infrastructure, SOEs and real estate towards service industries and SMEs, especially those that are labor intensive”
Is that even possible anymore, to see an increase at labor intensive industries? The wages are already high and getting higher. The direction is to establish labor intensive factories in other countries such as Vietnam (even if its production capacity is tiny in comparison to China, it is still where it’s going together with many other countries) and to increase efficiency — see latest foxconn statement on purchasing one million robots. It’s actually much more difficult than that as we are only mentioning obvious economic aspects and not including, for example addition of labor rules which considerably favor employees over employers.
One of my suppliers in China is producing a very simple paper product which uses about two people per machine, he recently started to explore intensively where and how to get specialty machinery to reduce the amount of workers to one employee per machine. It seems pretty clear that this is the direction where it’s heading…
Prof Pettis,
Is it correct in saying that capital projects are the jobs that are employing most of the Chinese people?
Also if manufacturing slows appreciably due to slowing export markets could we not see a scenario where domestic loans to SOE’s sour further and domestic consumer consumption falls due to a decrease in consumer credit?
I guess what I am asking is could Chinese growth slow due to outside shocks in the system as it did in late 2008-early 09?
Julia
As a casual observer I agree that the greatest threat to laborers all over the world is technology/automation not free trade or outsourcing. Gains in productivity go to a select few while millions of people are out of work or live in relative poverty. The only good news is that in the short term there will be an healthy demand for machinery and software as businesses “invest” in technology to eliminate workers cutting costs.
Mr Pettis
If you would entertain another question. Do you feel that the US will lose its AAA credit rating? What do you think is the most important consequence of the downgrade.
Gracias
Prof Pettis-
What would be in your opinion a trigger for any such crisis if it were to happen? A foreign debt crisis starts with confidence issues. US crisis manifested over a long period of time, and I guess open economy helped in identifying the problems. But at what level would this become unsustainable enough for government to act?
With the level of investment, why 2 years, why not 20 years? Corporate profitability in some of sectors with overcapacity is declining but doesn’t seem be slowing down as predicted by some. Shouldn’t that be the first trigger point?
I wonder if an internally-generated hard landing is even possible in China, since the major investor is the state, how could you get a sudden lack of confidence? One would need some incredible social upheaval and repudiation of the government, which is not likely to happen in the near future. Even suffering 4% negative real interest rates is still “minor” relative to the repression that has happened in the past. There is no sign that the current generation is agitating so it will have to wait for another. The shock will come from trade tensions as you have mentioned so many times.
The changing dynamic of the SME along China’s east coast is a very good topic for discussion. First, technology companies are inherently risky to lend to and so it will be interesting to see how bank loans perform. It’s a much different bank loan when you are lending to a sewing shop that has a firm order with a designer in the US supplying Target or Macy’s, as opposed to financing a firm that makes a product which will be technologically obsolete in 1 year, a firm that needs to reinvent itself every 18 months. Much different.
Furthermore, as Chinese firms move up the chain, then IP will become more important. Perhaps it will be a catalyst to real improvement in IP protection if mainland firms are hurt. (I love the story of Chinese authors suing Apple because Applie i store allows downloads of Chinese book sharing sites).
Lastly, as much of the sneaker making moves inland to chase the homebound migrants, I wonder if the cost savings will be eaten up by transportation cost increases and other hidden infrastructure costs. China’s freight costs are double that of most developed countries due to toll roads, no rail capacity for freight, etc.
I would also love to hear your thoughts, Michael, on Liu MingKong’s statement that the Chinese banks can weather a 50% downturn in mainland property values. I find it shocking that a chief regulator for any banking system in the world would make such a statement. Anyone who believes that might be a good customer for Florida swamp land. Laughable.
Prof Pettis
Also when you say growth will not slow appreciably what rate do you expect over the next 2 years. 4%? 6% or 9%? Thanks.
How do you come up with 2013 for a tentative date for problems emerging? I would say that the reliance on shadow-banking makes the whole structure much more vulnerable than just old plain govt directed bank lending. also looks to me that it is going to be difficult to justify another bout of infra spending given all the social tension and real estate will start feeling big pressure from H2 this year due to record levels of housing completions.
Mr. Pettis
An article in today’s New York Times discusses Chinese entrance into the high-quality pearl market: http://www.nytimes.com/2011/08/02/business/global/chinas-high-quality-pearls-enter-the-mass-market.html?_r=1&ref=business
As long as Chinese can keep finding products where they can displace producers outside of China, why can’t this keep going on for a long time?
It seems to me that household consumption in China has increased very rapidly in spite of the fact that it has fallen as a percent of GDP. From the point of the Chinese consumer, things are a lot better, and keep getting better. The government has delivered, and keeps delivering, on its promise of a much better life for everyone. Does it matter to ordinary people if this improvement is accompanied by a lot of misinvestment? That in theory they could be better off if their investments earned more?
“As a casual observer I agree that the greatest threat to laborers all over the world is technology/automation”
Oh indisputably. Cars and computers and houses in the suburbs and doctor visits are a terrible burden for the Wester worker. He endures these things with the painful realization that, in a better world, he might still be a peasant.
hard landing is out of question, under command economy, government could do so much more to kick start its economy. CN started from a low base, it was not that difficult to figure out what to do and where to invest. However this is not a sustainable/efficient way of doing things, in particular when government directed investments meet private challengers (under a liberalized economy). The biggest challenge for CN remains as structure shifting, which allows dynamic entrepreneurs regain their leadership in economics.
I don’t think bad debt or NPLs is such a big issue for a low start and fast growing economy like China. While the CN interbank debt mkt yield is well below the expected inflation, it takes almost no effort to inflate the way out. In contrast, structure change will be painful and lengthy, and involves so much more uncertainties. Apart from that, at a more fundamental level, demographics is another HUGE challenge in the coming decades.
@Costard
I do not think RS said anything about automation in manufacturing being restricted to the West or its allegedly decadent workers: he actually went out of his way to stress “all over the world.” Moreover, you focus strictly on the consumption of cars, computers, houses, and health care, but in doing so you neglect to discern what RS was really getting at, namely that, on the production side of affairs, a combination of growing productivity and increased automation has allowed companies to maintain steady output while simultaneously slowing or even reducing their payrolls. “Gains in productivity go to a select few while millions of people are out of work or live in relative poverty.”
The recent Foxconn episode in China is a good, albeit highly anecdotal, example of this phenomenon. Foxconn will still produce consumer electronics, but without 80% of its current workforce. If you insist on focusing on the “West,” then you can also look at corporate America’s record profits during a period of de facto double-digit unemployment, or at the US economy being several trillion USD larger than it was in 2000, despite employing fewer workers overall.
@ marketfollower
Even if consumption does increase in absolute terms, as long as it continues to lose ground to investment, then the household sector will eventually have to mop up the misallocated capital. This cleaning up does not make for very flashy news, as evinced by the media ignoring, or even praising, the response to China’s 2000/1 banking crisis, which helped fuel lower consumption shares. I think John Lee of the Hudson Institute has also argued that, since that time, the number of Chinese living in absolute poverty has actually increased.
A couple of questions…
First, if it’s true as the ft says that low-end manufacturing SMEs are disappearing from their traditional location, where is that activity going? If it’s elsewhere in China, that would represent growth overall, and not restructuring.
Second, could you explain why writing off debt in the banking sector would be at the expense of depositors. I don’t understand Chinese banking, but surely equity holders should take the hit, not depositors?
[...] China Financial Markets » No hard landing, but no solution. [...]
@ Marketfollower
The growth of the consumer market in China is inviting. But I see it this way…you’ve got 300 million connected, priveliged consumers while the other 1 billion are toiling for scraps. 300 million consumers is a big market and the world is focused on how to meet the needs of such consumers. Meanwhile, the other billion are scraping by and are asked to look at the massive investment projects as sources of national pride. Not at all a balanced economy and China will need to continue to rely on outside demand (exports) or infrastructure spending (investment).
The problem with investment is that it is funded with debt, bank debt. These are loans based on ginned up projections that show the investment will be profitable either standalone or with small subsidies from local, provincial or central government. Most projections, in my opinion are wildly optimistic and no one questions the numbers because the investment decisions come from high level party members. No one will question the Lingdao.
I have been in China almost 5 years in the financial field and I have never seen such a cavalier approach to investment analysis. My favorite recent story is you have one Chinese real estate developer and also an internet firm building pig farms to take advantage of the high pig prices plus subsidies. May as well go to Macao and place it on 00 at the roulette wheel.
Many Infrastructure projects will not yield the economic benefits projected and even more worrisome to me is the massive industrial capacity expansion that China carried out over the last 3 years that will need to be absorbed in some fashion (who’s going to buy all that stuff?)
So companies will begin to have trouble repaying principal or even servicing interest, which means banks will encounter more NPLs and have to restructure loans. They will be forced to increase exposures to cover the debt servicing needs of poorly capitalized, poorly performing investments. In order to fund the loans banks will need low cost liquidity from some source. The biggest source of liquidity is depositors. Those deposits must be cheap in order to allow the banks sufficient spread (margin) to heal themselves and cover the uncollectible loans. This is why it will be difficult for China to reform its financial industry near term. The banks will need forced liquidity to get healthier and so the CBRC and PBOC will need to prevent that depositor cash from leaving banks. Already there is some evidence of this disintermediation by the growth of entrusted loans and wealth management business. The regulators will continue to have to play the financial equivalent of that arcade game where you use the hammer to bop the groundhog who sitcks his head out of one of many holes. Closing the gaps for deposit outflow is the way China “socializes” bad loans (to use Michael’s term).
Professor Pettis,
Which do you think is a bigger driver in increased automation in China: rising wages or cheap loans? It seems to me that cheap loans enable factories to make (perhaps unnecessary) capital investments, which then inherently drive up the cost of labor. It does not seem like scarce labor has driven up costs, but I am interested in your opinion.
Also, a lot of China “business experts” I speak with think that rural China still offers unlimited potential for cheap labor, even if the coastal areas are already expensive. I disagree, since capital costs are going to be the same regardless, and the intense investment nationwide means labor is going to be a smaller part of the equation. What do you think? Is western China still going to be a haven for cheap labor in the near to mid-term? It seems like all this capital investment is going to ruin the cheap labor advantage nationwide.
Julia, I suspect the best thing to do is not necessarily expand the tradable goods sector that depends on very low wages but rather reduce capital intensivity in the SOE sector and expand the services industries.
RS, I don’t have a breakdown of labor per sector, so I m not sure, but infrastructure and real estate have probably been the fastest growing areas in the past three years. As for your second question, I don’t think the US will lose its AAA rating but even if it did it wouldn’t make any difference, especially for foreign central banks. They don’t accumulate USG bonds for investment reasons but rather for trade reasons.
Luhar, the issue is at what point debt levels trigger a sharp drop in investment. I have no scientific basis for saying this, but my guess is that China can only tolerate another four or five years of debt growth before it reaches debt capacity limits, and of course I hope policymakers react at least a couple of years before that happens.
JT, a hard landing is always possible if there is the domestic perception of a debt crisis, but I agree that this is unlikely. What is more likely is a very long, decade or more, period of much slower growth.
Hua Qiao, in traditional corporate finance theory you are never supposed to lend to high-tech or R&D companies. They should only be financed by equity because financial distress costs come too easily and quickly. So it will indeed be interesting to see what happens. As for Liu Minkong’s statement about the manageable impact of a 50% decline in real estate prices, rather than go into too much detail I would only suggest two things. First, it is very unclear what the direct and indirect exposure is to the real estate sector, but most Chinese bankers tell me it is much higher than the stated numbers suggest. Second, I think you will have real trouble finding a case of a banking crisis that was not preceded by similar statements buy the regulator. To me assurances by banking regulators that banks can withstand X, Y or Z is just noise that has almost no informational value.
RS, I will discuss my growth expectations in my next newsletter.
Che, there is a leadership change in late 2012. Most of us believe that Beijing is very unlikely to turn off the credit machine before then.
Marketfollower, the problem is that the current growth model requires an infinite capacity on the part of the external sector to absorb Chinese surpluses, or an infinite capacity for debt, of both.
Meng, the problem with your analysis is that it doesn’t keep the accounting identities in place. Of course China can inflate away the debt, but this is not a cost-free solution. It is simply a way of forcing households into paying, and if we do that then we cannot expect consumption to pull growth. In which case the only way out is to mis-invest even more, which will create even more bad debt and will require even more household transfers. This can’t go on forever. Household consumption dropped from 51% in 1990 to 46% in 2000 to 34% in 2010. There is a limit to how low household can be pushed, and the limit, of course, is closely tied to total debt capacity.
DNM, first, equity is much too low to absorb NPLs, so the balance must be absorbed by someone else, which is inevitably households via the government. Second, much of the equity in the banking system is owned by the central or local governments (sometimes indirectly), so any losses, once again, have to be covered by households.
So the message is;
China will be fine as much there is room for debt, that I agree. My question is, we know the “real” China debt?
Second question, out of topic, but linked with debt.
There is room for another world reserve currency…. I mean what is the future of CNY?
I get the basic macroeconomic problem that China has too much saving relative to any conception of good investment given China’s distribution of income and institutional constraints.
But I have almost no direct understanding of China’s institutions themselves.
So would someone please enlighten me about the State’s control of the SOEs and the motivation behind the way that control is exercised (or not exercised). I though that China was supposed to be run by real, honest-to-God Commies. Not lame, pinko, Obamacare socialists – but red flag-waving, business nationalizing, water-fluoridating Commies! The sort who would put pictures of Chairman Mao on your money if you gave them the chance.
And yet the SOEs seem to operate like feudal states under some appointed nobility. Their only aim seems to be aggrandizement for the glory of the lord. So on top of the whole feudal thing, they add the worst of Marx’s ideas about capitalist accumulation leading to economic crisis. Haven’t they ever hear of Marx’s Law of Declining Profits?
But if China has too much saving, the savings of the SOE can be redistributed without any threat to the sacred principle’s of protection of private property – in theory the SOEs are already state property. Can’t the state order them to pay dividends instead of trying to reinvest the money? Instead of running up a $350 billion current account surplus, why can’t the PRC pay a $300 dividend to every man, woman, and child in China? Wouldn’t that be popular? Or why can’t they use the money to build a public health system like Obama care? I know that China has tea, but do they have a Chinese Tea Party?
Somebody please explain the system. Aren’t the SOE’s the means of production seized by the state? Aren’t they good enough commies to run private enterprise?
“Julia, I suspect the best thing to do is not necessarily expand the tradable goods sector that depends on very low wages but rather reduce capital intensivity in the SOE sector and expand the services industries.”
This is similar to what the powers that be announce every now and than, the push for the services industry.
If this is indeed the only option, than China is doomed.
Services on a grand scale require a certain infrastructure which currently does not exist in China.
That’s just not going to happen at least for many many years to come.
Julia:
Well one would have to start at some point to alter the model that siphons off growth from fellow developing nations, imbalances the global growth projectery and negatively impacts the global growth agenda. Where,I heard recently from someone the globalization causes hunger, and my mind immediately went to the first principle that, no globalization doesn’t sex does, as it causes mouths to feed, where it seems that over the last century people have had considerably more sex due to population growth figures, which is somewhat tongue in cheek, but when coupled to advances across a broad range of domains, leading to more people of longer lives. Ideological twinges to the basic and fundamental realities of the world, need be jettisoned when reviewing what will happen, has to happen, and for propelling a system for the development of the world. Even the street people who feed off of trash cans in the cities and garbage dumps of the world need something to scavenge. Further the largest companies in the industries of the world, and are are leading the forefront of resource efficiency, if some lounge on leather couches sipping cappuccinos and lamenting “those” people who are the problem and decrying the system that we hoped to change in our ignorant youth. The fact is the path toward higher standards of living is an expectation of the worlds people’s, regardless of the romantic visions of some with the luxury to desire otherwise, where the introduction of a vast proportion of the global population under a short period of time has impacted the functioning of that which has been quite successful at advancing the people’s of the world. Alterations that threaten to retreat tHe advanced countries will limit the advancing countries potentials, cognizance of such will eventually force alterations that some have hoped to delaY.
Values and beliefs are important, first principles in these more than extrapolations, what is right and good and possible need be balanced. Even the s&p’s comments yesterday, as to the rights of some large holders of treasuries in the current dialogue regarding us debt, illustrates simply how confused so many are on these issues. Where so many things are right and good, their realitY and eventuation might portend very different results, even wasting time on Kyoto when china and India will soon pass combined historical emissions of the rest of the world, before a child born today reaches puberty, underscores how misguided so many are on these issues. Just for one such example.
Anyway, china does have a very extensive service sector, and could only benefit domestically from enhancement of these at higher levels in the economy. Sometimes I wander if even the smartest of us out here in the world are not too, or, overly influenced by the more fanciful or imaginative of us, where there is a role for the the creative types, in certainly shouldn’t be found in the creation of our world views or policies for creating better futures.
Csteven,
mmkay… I’m not sure what I’m supposed to say to that other than to repeat my previous post maybe…
Mr. Meng talked like a policy advisor in PBoC or some other institutions in central government. His tune reminds me Fan Gang. Mr. Fan expressed a lot of shocking views publicly. But the hard truth is that they were actually talking right, which was exactly the way the government took actions, for less harming the “significant” interested groups as possible as they could. People can see China’s wealth distribution or reform as a process of continuously testing the bottom line of Chinese abiding people. But, how low could that be in the future?
I live in Asia and judging by sentiment, the only worry to most Chinese is inflation. Most are complaining that food is expensive, property is expensive, basically everything is expensive. Worst of all, Chinese are very willing investors however with Government tightening interest rates and other related tightening measures, stockmarkets have been going sideways and thus for most mainland Chinese, with a lot of restrictions to what they are allowed to invest into, basically have no where else to invest other than their own currency – renmenbi. The Shanghai stockmarket has been going down slowly since June 2009. The negative feelings accumulated are basically making Chinese think that China will experience a hard landing because of the severe inflation.
However consensus and normal layman have the credibility of being mistaken most of the time. And thus because most of them think there’s going to be a hard landing, the chances of it becomes very slim. Adding onto this, from a technical analysis perspective, stocks usually go up at a very steep rate, and fall steeply too. Chinese stocks have been trickling down like an old man slowly walking slowly on a path. Very hard to conclude from this a hard landing would occur. Thus I agree with your analysis.
Prof Pettis
Agree with your stance that the idea of growing out of a crisis by ignoring or increasing debt is merely postponing the problem. Think it’s in the spirit of the times that we see that the most fluid of all things in the financial world is the transformation or rather the transfer of debt. From the credit crisis where banks and other financial institutions “transferred” potentially crippling debts to the people or(aided by the mechanism of government bailouts) public sector, to the idea that we can continue transferring problems and in the process “solve” them is really a sign of the times: problems are so big no one wants to face them and prefer to postpone it so that it becomes someone else’s problems. While a rapid growth in consumption on the part of the Chinese private sector would bring new dynamics into play and perhaps prove a new engine of growth, what is to say that ultimately it would not prove to be a poisoned chalice that leads to the same problems Chinese commentators are rather “spiritedly” criticising the West for? When problems combine, things could get ugly and the backlash even uglier. It has been a summer of discontent, little reason to expect better perhaps, which makes our times way too interesting.
so what, stay with investment in productive capacity, even bigger problems, not an if, but a when…must alter or bastardization where those with the most to lose will be those who still are in need of development