From Neue Zürcher Zeitung's TheMarket.ch, July 25:
Beijing-based economist Michael Pettis expects global trade conflicts to escalate. China is reaching the limits of its growth model, but Beijing is avoiding painful adjustments.
«There is a huge misalignment in China's economy», said Joerg Wuttke, former President of the EU Chamber of Commerce in China, recently in this interview with The Market NZZ. More and more voices are saying that the People’s Republic is at a similar point to the one Japan was facing at the beginning of the 1990s.
In mid-July, the so-called Third Plenum of the Central Committee of the Communist Party, which discusses economic policy, took place in Beijing. However, anyone expecting the announcement of far-reaching reforms or major stimulus programs was left disappointed.
Few Western observers are more familiar with China’s economy and financial system than Michael Pettis. The American has lived in the country for more than two decades and teaches as a professor of financial theory at the renowned Guanghua School of Management at Peking University. Pettis sees no easy way out of the economic slump; the crisis in the property sector is only halfway through. «As long as the government is not prepared to take the pain, there will be no real solution,» he says in an in-depth conversation with The Market NZZ.
«If you build something useless that costs you 100, and you put it on your balance sheet and say that you are now richer by the amount of 100, you are fooling yourself. It’s worth zero»: Michael Pettis.
The Third Plenum has ended last week. What is your first take on its outcome in terms of economic policy?
I don’t think anyone was much surprised. The Third Plenum communiqué, released last week, was much vaguer on demand-side measures designed to boost the role of consumption in driving the Chinese economy than it was on supply-side measures, even though it is increasingly recognized that the main constraint in the economy is weak domestic consumption.
China’s economy keeps disappointing lately. What’s holding it back?
The problem is that it’s not really clear what Beijing can do. If you want 5% growth, you either need a surge in investment or a surge in consumption. The trade surplus can add to growth too, but that’s only 5% or 6% of GDP, so that’s too small to really move the needle.
Walk us through the government's options, then. What about investment?
There are three possible sources of investment: one, the property sector, which is contracting and there’s nothing the government can do about that. Two, infrastructure investment, which is a bigger problem than the property sector. The central government would like to rein it in because they recognize that it’s the source of much of the bad investment and debt at the local government level. Three, and this was their magic trick to solve all problems, was to pour investment into the manufacturing sector. The problem with that is, if you are a small country, you can do that and nobody will notice. But when you’re the second largest economy, 17% of world GDP, and you already account for 31% of global manufacturing, you can’t do that unless the rest of the world is willing to accommodate the increase in your share of global production.
Which, as we see now, the world is not prepared to do anymore?
Exactly. Even if the world were a friendlier place, there was no chance the rest of the world would accommodate all that overproduction coming out of China. And of course, given how unfriendly things are, the rest of the world has said ‹absolutely not›. As America and Europe take steps to reduce their imports from China, some hoped that China could shift its surplus to the developing world. But it turns out that the developing world also wants to protect their manufacturing share. We’ve already seen Brazil, Turkey, and Indonesia putting up import tariffs, and that is likely to spread. This is a big thing. They made a huge bet that they would be able to shift investment out of the property and infrastructure sectors and into manufacturing. It seems they seriously miscalculated the willingness and even the ability of the rest of the world to accommodate such a rapid increase in China’s already-large share of global industry....
....MUCH MORE
Our last visit to NZZ was the interview with Joerg Wuttke mentioned above:
«The Playing Field for China is Getting Narrower and Narrower»
And prior to that:
«Artificial Intelligence Holds a Lot of Potential for the Pharma Sector»
This gentleman's employer, Capital Group, is one of the big investment managers that I rarely think about. If asked for their assets under management I'd guess "a trillion". I'd be off by 150%. They are at $2.5 trillion AUM (I looked it up)....
