Open QuestionsEconomist Michael Pettis on China’s consumption paradox and the pitfalls of a trade war
The professor of finance and author talks China’s economy and argues the US dollar’s monopoly role in trade is an ‘unsustainable’ anomaly
After more than two decades in China - including years spent teaching finance at Peking University and Tsinghua University - Michael Pettis has become an oft-cited voice on the challenges faced by the world’s second-largest economy. Before moving to Beijing, he also worked on Wall Street as a trader, with stints at JP Morgan and Bear Stearns.
In this interview, Pettis discusses the dichotomy between China’s household consumption and its world-leading manufacturing sector, evaluates the new global landscape for trade and reminisces about the glory days of Beijing’s arts scene.
China’s economy has been under scrutiny for its ability to sustain growth, especially with the annual gross domestic product target set at “around 5 per cent”. What is the biggest challenge facing the Chinese economy?
I think everybody understands the basic problem of the Chinese economy – very weak domestic demand.
For any economy there are two components of domestic demand – consumption and investment.
Chinese growth has always been extremely investment-oriented. Not only does it have the highest investment share of GDP in history, but even if China were to reduce that share by 10 percentage points, it would still be one of the highest investing countries in the world.
The massive investment made sense in the 1990s and 2000s when China had enormous investment needs: roads, bridges, factories, airports, everything.
The problem is that every country following a high-investment growth model eventually runs out of productive investment opportunities, and because it is too difficult to reverse the growth model, it begins to invest non-productively. It is only when this happens that the debt used to fund investment begins to grow more rapidly than the economy, and we start to see a rapid growth in the country’s debt-to-GDP ratio. This has been happening in China now for well over a decade.
When it’s hard to rely on investment to drive growth and difficult to boost consumption, the only way China can resolve the imbalance between domestic production and domestic consumption is with large and growing trade surpluses, but of course this can only continue as long as the rest of the world is willing or able to absorb those trade surpluses.