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Avoiding the Fall: China's Economic Restructuring
The days of rapid economic growth in China are over. Mounting debt and rising internal distortions mean that rebalancing is inevitable. Beijing has no choice but to take significant steps to restructure its economy. The only question is how to proceed.Michael Pettis debunks the lingering bullish expectations for China's economic rise and details Beijing's options. The urgent task of shifting toward greater domestic consumption will come with political costs, but Beijing must increase household income and reduce its reliance on investment to avoid a fall.
172 pages, ebook
First published January 1, 2013
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Displaying 1 - 15 of 15 reviews
May 9, 2014
Read this perhaps a month ago now. Pettis' strength is that for an economics writer he avoids math and uses basic accounting equalities and empirical examples to make his arguments, so they can followed by anybody with a willingness to work through the arguments; his weakness is that he tends to repeat himself and can be a bit wordy; much of his thought on China can be found over the last five years of his blog, though the book puts it all nicely together. His is I think an important voice; I don;t completely agree with him but because he phrases his arguments quite clearly -- in this book he also states what someone who disagrees with him (e.g. a China bull) must prove -- this means you have to clarify your own reasons for disagreeing.
The crux of this book is that China has undergone a period of seriously distorted growth, and that it is due for a slowdown. I agree with that. What is of interest is how he looks at the proportion of investment and consumption and basically says that if investment is going down, then mathematically you need consumption to grow, in order to maintain a certain level of growth. But if consumption falls, and if China is still forced to rebalance (for various reasons, e.g. largely financial and environmental constraints) then investment will have to fall off a cliff in order to rebalance, and growth will fall off a cliff. This is his baseline scenario, and on this basis he argues that China needs to urgently stimulate consumption, such as by building a social safety net, financial liberalization, land reform, etc, etc. Further, in a valuable chapter 7, he also argues that to be a China bull, you need to address three points: 1. how much debt does China really have, and what is the true cost of debt service if interest rates were not repressed? 2. How will China make good investments that allows it to earn enough future income, above the real cost of capital? 3. Specifically, how will consumption grow?
Thing is, I think China's leadership gets it. Whether they are being forced to get it or willingly getting it, or pretending and acting as if they get it or having really got it, they are acting as if they got it -- and I think that matters. China has been (as of May 2014) making a lot of moves in the direction of structural reform, many along the same lines that Pettis proscribes. Time will tell if the leadership can execute, but they have so far shown a willingness to (again, not sure how genuine, but I don't think it matters... There is an interesting discussion to be had at some stage whether China's leadership is benevolent or a bunch of rogues who know they need to keep the goose alive... but the reforms right now are so basic that the latter question is not yet relevant, imo...) So on the whole, I think this book frames the issues as well as any other I have seen, but that its pessimism is not entirely warranted (I am, however, a mild bear on China; I don't think it will crash, but I do think they have serious structural problems and constraints that will take time and political will to fix; but ultimately think they will muddle through).
The crux of this book is that China has undergone a period of seriously distorted growth, and that it is due for a slowdown. I agree with that. What is of interest is how he looks at the proportion of investment and consumption and basically says that if investment is going down, then mathematically you need consumption to grow, in order to maintain a certain level of growth. But if consumption falls, and if China is still forced to rebalance (for various reasons, e.g. largely financial and environmental constraints) then investment will have to fall off a cliff in order to rebalance, and growth will fall off a cliff. This is his baseline scenario, and on this basis he argues that China needs to urgently stimulate consumption, such as by building a social safety net, financial liberalization, land reform, etc, etc. Further, in a valuable chapter 7, he also argues that to be a China bull, you need to address three points: 1. how much debt does China really have, and what is the true cost of debt service if interest rates were not repressed? 2. How will China make good investments that allows it to earn enough future income, above the real cost of capital? 3. Specifically, how will consumption grow?
Thing is, I think China's leadership gets it. Whether they are being forced to get it or willingly getting it, or pretending and acting as if they get it or having really got it, they are acting as if they got it -- and I think that matters. China has been (as of May 2014) making a lot of moves in the direction of structural reform, many along the same lines that Pettis proscribes. Time will tell if the leadership can execute, but they have so far shown a willingness to (again, not sure how genuine, but I don't think it matters... There is an interesting discussion to be had at some stage whether China's leadership is benevolent or a bunch of rogues who know they need to keep the goose alive... but the reforms right now are so basic that the latter question is not yet relevant, imo...) So on the whole, I think this book frames the issues as well as any other I have seen, but that its pessimism is not entirely warranted (I am, however, a mild bear on China; I don't think it will crash, but I do think they have serious structural problems and constraints that will take time and political will to fix; but ultimately think they will muddle through).
March 8, 2017
The previous reviewer summarized the book well, so I will just emphasize that Pettis uses almost no math in his books. He explains everything via verbal logic, which in many cases requires extremely long and convoluted sentences that one must ponder to parse. Many of us learned economics the quantitative way, so be prepared to spend some time on this little book if you are not experienced with the verbal logic method of Keynes and the "old school" economists.
August 16, 2021
Anterior al famoso "Trade wars are class wars" que es una continuación y extensión a nivel global de lo que aquí se plantea para China. Escrito en 2013, el libro plantea básicamente que el modelo de crecimiento chino basado en una inversión financiada esencialmente por una enorme tasa de ahorro (y por tanto una restricción del consumo interno) está generando unos desequilibrios en la economía que deberán "reequilibrarse" por las buenas a través de una serie de complejas decisiones políticas o por las malas a través de una crisis de deuda o una década perdida a la japonesa. Esta es al final la clave del libro: el crecimiento de China se basa en una inversión financiada por deuda que, aunque genera PIB y empleo a corto plazo, ha degenerado en una sobreinversión improductiva incapaz de pagar la deuda, que se habría vuelto insostenible. Sería interesante contrastar cómo está la situación 8 años después (algunas de las predicciones claramente no se han cumplido, otras sí, otras parecen sr tendenciales) aunque el autor sigue manteniendo posturas similares en Twitter.
June 1, 2021
A good explanation on the Chinese economy and the need for the restructuring . Shifting the wealth from the state and wealthy entities to the households to increase consumption as a percentage of GDP as a driver for future growth . China has been imposing a hidden tax on households and subsidising the industries to drive growth .
December 19, 2020
Very lucidly explain balance of payments crisis in China . Love the lack of charts and the way points were conceptually explained.
This book is a great primer to understand China's model and the issues
This book is a great primer to understand China's model and the issues
April 21, 2018
Fresh insight, especially about accounting wise. But it could be more compacted.
February 9, 2019
Good counter view against China bull market. Lot of repetition in the book. Good to read if you are “allthingsmadeinchina”
November 7, 2020
not much new here if you've read the great rebalancing :)
May 26, 2022
State-owned enterprises are actually wiping out value....Quite think so.
October 24, 2024
Too short
January 20, 2016
"China's trade surplus ... is simply a residual that is necessary to keep investment-driven growth manageable under conditions of repressed domestic consumption." (22)
"Rising investment, rising savings, and rising trade surpluses are inexorably linked in China's case, and nothing suggests the impressiveness of the increase in the national savings rate as much as the fact that China was able to combine a soaring investment rate with a soaring trade surplus. ... [M]any policies, ranging from undervalued currencies, to lagging wage growth, to financial repression, to environmental degradation and weakening social safety nets as ... encouraged very rapid growth but at the expense of the household share of that growth." (28-9)
"[T]he low, or even negative, cost of capital for Chinese borrowers explains the seeming paradox of China's capital-intensive, rather than labor-intensive, growth. Ask most people what China's comparative advantage is, and they are likely to say that it is the huge pool of cheap and disciplined labor. But in fact this doesn't seem to be reflected in the economy. If China's comparative advantage were cheap labor, we would expect its growth to be heavily labor-intensive as businesses laded up on the most efficient input. But China's growth is actually heavily capital-intensive." (38)
"At some point ... capital users begin to destroy wealth, but they nonetheless show profits by passing on more than 100 percent of the losses onto households. The very cheap capital especially means that a very significant portion of the cost -- as much as 20 to 40 percent of the total amount of the loan -- is forced onto depositors just in the form of low interest rates. This is effectively a form of debt forgiveness granted, unknowingly, by depositors." (42)
"Either Beijing moves quickly to bring investment growth down sharply, or overinvestment will contribute to further financial fragility, leading ultimately to the point where credit cannot expand quickly enough and investment will collapse anyway. This is just arithmetic." (86)
"One way or another as China rebalances, it will lose competitiveness abroad because it must raise the cost of production in favor of household income. In exchange, however, China's domestic market will become a bigger source of demand as Chinese households benefit from rebalancing. Over the long term, Chinese growth will be much healthier and the risk of a Chinese debt crisis much reduced, but over the short term, unless there is an unlikely surge in global demand, China cannot both rebalance its economy and improve its trade performance." (96)
"Revaluing the renminbi, in other words, is important and significant because it represents a shift of wealth, largely from the People's Bank of China, exporters and wealthy Chinese residents who have stashed away a lot of their money in foreign banks, in favor of the rest of the country. ... Just as a revaluation of the renminbi implies a transfer of wealth from the People's Bank of China to Chinese households, and so is likely to increase consumption, other transfers from the state sector to households can have the same effect." (149-50)
"Rising investment, rising savings, and rising trade surpluses are inexorably linked in China's case, and nothing suggests the impressiveness of the increase in the national savings rate as much as the fact that China was able to combine a soaring investment rate with a soaring trade surplus. ... [M]any policies, ranging from undervalued currencies, to lagging wage growth, to financial repression, to environmental degradation and weakening social safety nets as ... encouraged very rapid growth but at the expense of the household share of that growth." (28-9)
"[T]he low, or even negative, cost of capital for Chinese borrowers explains the seeming paradox of China's capital-intensive, rather than labor-intensive, growth. Ask most people what China's comparative advantage is, and they are likely to say that it is the huge pool of cheap and disciplined labor. But in fact this doesn't seem to be reflected in the economy. If China's comparative advantage were cheap labor, we would expect its growth to be heavily labor-intensive as businesses laded up on the most efficient input. But China's growth is actually heavily capital-intensive." (38)
"At some point ... capital users begin to destroy wealth, but they nonetheless show profits by passing on more than 100 percent of the losses onto households. The very cheap capital especially means that a very significant portion of the cost -- as much as 20 to 40 percent of the total amount of the loan -- is forced onto depositors just in the form of low interest rates. This is effectively a form of debt forgiveness granted, unknowingly, by depositors." (42)
"Either Beijing moves quickly to bring investment growth down sharply, or overinvestment will contribute to further financial fragility, leading ultimately to the point where credit cannot expand quickly enough and investment will collapse anyway. This is just arithmetic." (86)
"One way or another as China rebalances, it will lose competitiveness abroad because it must raise the cost of production in favor of household income. In exchange, however, China's domestic market will become a bigger source of demand as Chinese households benefit from rebalancing. Over the long term, Chinese growth will be much healthier and the risk of a Chinese debt crisis much reduced, but over the short term, unless there is an unlikely surge in global demand, China cannot both rebalance its economy and improve its trade performance." (96)
"Revaluing the renminbi, in other words, is important and significant because it represents a shift of wealth, largely from the People's Bank of China, exporters and wealthy Chinese residents who have stashed away a lot of their money in foreign banks, in favor of the rest of the country. ... Just as a revaluation of the renminbi implies a transfer of wealth from the People's Bank of China to Chinese households, and so is likely to increase consumption, other transfers from the state sector to households can have the same effect." (149-50)
January 8, 2014
Avoiding the Fall (2013) by Michael Pettis is a book that looks at the imbalances in China’s growth. Pettis lives in Beijing and is a professor of finance there. He was a very successful trader prior to this.
Pettis thinks that China is massively over investing in infrastructure and that this investment has become unproductive. He thinks that China’s lack of consumer consumption is a profound problem and that within the next decade China will crash as many other countries have as their growth is dependent on exports and investment.
In the book Pettis points out that Chinese consumption is extremely low, at around 35% of GDP compared to successful developed countries such as the US where it is 60+% of GDP. He points to the examples of Brazil in the 1980s, Japan in the 1990s, the US in the early 1930s and a hypothesized example of Germany in the late 1930s as examples of a failure of this kind of development. He then spends much of the pondering how China can possibly increase consumption rapidly enough to handle a fall in GDP growth when investment and export growth simply cannot support the growth of the economy any more.
The argument that Japan, Brazil, the US & Germany have crashes in common is also worth looking at. Brazil does not fit into the group. When Brazil crashed it was not at a world leading level of wealth per capita. The question for China is when will growth slow down? It could be as early as around 2015 when Chinese wage rises mean that the US and other countries become competitive for manufacturing or it could be in 2030 by which time China will comfortably be the world’s largest economy.
Pettis has made an interesting bet with The Economist newspaper that China’s GDP will not surpass America’s in 2018. The Economist has accepted that bet and made a counter proposal against a belief of Pettis that China’s growth will not surpass 3% in the 2010s.
The book is somewhat reminiscent of the arguments of Steve Keen, the Australian economist who believed that there was massive debt overhang in the early 2000s that would lead to a financial calamity. Keen was right overall but wildly wrong on detail, he made a bet that Australian houses would plummet in value which they promptly did not. Nonetheless Keen was right overall that global debt and housing price rises would lead to serious trouble. It’s hard not believe that Pettis has a similar point even if he is wrong about the detail of why Chinese growth will, in the next decade, slow dramatically at some point.
The book is definitely worth reading for anyone interested in looking at why China may well crash in the next few years. It may well be wrong, but it is definitely not crazy and definitely is fascinating.
Pettis thinks that China is massively over investing in infrastructure and that this investment has become unproductive. He thinks that China’s lack of consumer consumption is a profound problem and that within the next decade China will crash as many other countries have as their growth is dependent on exports and investment.
In the book Pettis points out that Chinese consumption is extremely low, at around 35% of GDP compared to successful developed countries such as the US where it is 60+% of GDP. He points to the examples of Brazil in the 1980s, Japan in the 1990s, the US in the early 1930s and a hypothesized example of Germany in the late 1930s as examples of a failure of this kind of development. He then spends much of the pondering how China can possibly increase consumption rapidly enough to handle a fall in GDP growth when investment and export growth simply cannot support the growth of the economy any more.
The argument that Japan, Brazil, the US & Germany have crashes in common is also worth looking at. Brazil does not fit into the group. When Brazil crashed it was not at a world leading level of wealth per capita. The question for China is when will growth slow down? It could be as early as around 2015 when Chinese wage rises mean that the US and other countries become competitive for manufacturing or it could be in 2030 by which time China will comfortably be the world’s largest economy.
Pettis has made an interesting bet with The Economist newspaper that China’s GDP will not surpass America’s in 2018. The Economist has accepted that bet and made a counter proposal against a belief of Pettis that China’s growth will not surpass 3% in the 2010s.
The book is somewhat reminiscent of the arguments of Steve Keen, the Australian economist who believed that there was massive debt overhang in the early 2000s that would lead to a financial calamity. Keen was right overall but wildly wrong on detail, he made a bet that Australian houses would plummet in value which they promptly did not. Nonetheless Keen was right overall that global debt and housing price rises would lead to serious trouble. It’s hard not believe that Pettis has a similar point even if he is wrong about the detail of why Chinese growth will, in the next decade, slow dramatically at some point.
The book is definitely worth reading for anyone interested in looking at why China may well crash in the next few years. It may well be wrong, but it is definitely not crazy and definitely is fascinating.
December 23, 2013
In many ways the argument this book makes about China's economy is now conventional--its growth has been fueled by investment, the investment is funded through financial repression that results in an extremely low consumption share of national income, much of the investment is misallocated in part because of the scale and in part because of the poor incentives and mispricing, it will inevitably have to rebalance--a process that could be rapid/disorderly or managed/orderly. The upside is that while China will slow dramatically in the rebalancing process, the shift towards consumption will partially offset that slowing and insulate the household sector. The downside is that notwithstanding this the most benign forms of rebalancing are politically threatening and thus, in Michael Pettis's view, unlikely to occur. The story Pettis tells would all cohere even if China was a closed economy--much of it is about domestic savings and its allocation to domestic investment--although it also has a substantial international component that will affect the global economy.
What makes Pettis's book so striking is when he puts his arguments to the test--predicting that China will grow at a 3-4 percent annual rate in the coming decade. This puts him numerically below many of the other China bears even if his qualitative arguments are similar.
Some of the argumentation in the book is overly breathless for my taste, especially around global rebalancing. And much of it makes it sound like Pettis has invented some of the more basic concepts. But overall it is an interesting, provocative and timely take on China's economy.
What makes Pettis's book so striking is when he puts his arguments to the test--predicting that China will grow at a 3-4 percent annual rate in the coming decade. This puts him numerically below many of the other China bears even if his qualitative arguments are similar.
Some of the argumentation in the book is overly breathless for my taste, especially around global rebalancing. And much of it makes it sound like Pettis has invented some of the more basic concepts. But overall it is an interesting, provocative and timely take on China's economy.
April 29, 2014
One of the best books I have read this year.
The reader would require a basic understanding of balance of payments, but beyond that, Pettis does a fabulous job of explaining what has been going wrong with the China model of growth, and how it has been successfully fire-fighting up until now.
I particularly admire the sequence of chapters and perfect progression of explanation of the situation.
Pettis draws apt parallels between China, and Brazil of 70s, US of the 20s and 30s, Japan of the 90s; and very logically goes on to show the need for China to rebalance, followed by how it could potentially do so.
He also addressed a very big confusion - why has Chinese inflation been so low in the face of growing credit and very high nominal GDP growth.
This book is already a classic for me.
Sub three percent growth is a certainty.
The reader would require a basic understanding of balance of payments, but beyond that, Pettis does a fabulous job of explaining what has been going wrong with the China model of growth, and how it has been successfully fire-fighting up until now.
I particularly admire the sequence of chapters and perfect progression of explanation of the situation.
Pettis draws apt parallels between China, and Brazil of 70s, US of the 20s and 30s, Japan of the 90s; and very logically goes on to show the need for China to rebalance, followed by how it could potentially do so.
He also addressed a very big confusion - why has Chinese inflation been so low in the face of growing credit and very high nominal GDP growth.
This book is already a classic for me.
Sub three percent growth is a certainty.
November 30, 2013
If you have read his previous book: "The Great Rebalancing" and are a regular reader of his great blog, this book will feel repetitive. It's a great book though
Displaying 1 - 15 of 15 reviews