Michael Pettis, *Avoiding the Fall*, and China’s economic growth

Last night I read the new and excellent Michael Pettis book Avoiding the Fall: China’s Economic Restructuring.  It is the single best treatment I know for understanding the dilemmas of the current Chinese economy and the need for restructuring.  My favorite bits are those comparing the current Chinese economy to the Brazilian growth of the 1960s and 70s, also investment-driven, and lasting longer than most people thought possible, and culminating in the crack-up of the 1980s, which turned out to be a lost decade for Brazil.

By the way, China’s economy continues to defy the China skeptics (a group which includes me):

China’s economy expanded 7.8 per cent in the third quarter from the same period a year earlier, marking an acceleration from the second quarter when it grew by 7.5 per cent.

The rebound in the world’s second-largest economy was largely the result of government efforts to shore up growth with looser monetary policy and a “mini-stimulus” of investment in infrastructure such as rail and subway systems.

The full FT article is here.  As Pettis stresses, such developments are likely to intensify the eventual “discontinuity,” but of course the China skeptics have not yet been proven right…


The problem with China skeptics is that in their analysis:
Chinese=Brazilian=South Africans=Thais

But we all know that is not quite true.

Kind of like trying to predict Lebron James future performance by analysis all the 6'10" forwards that had played in NBA before. And some people wonder why Economic is considered pseudo-science at best.

No, it's like comparing Lebron to other great forwards and concluding that he may win 4-6 MVPs in a row, but he will not win 8.

If the analysis is "Chinese=Brazilian=South Africans=Thais", then it's more like trying to predict a basketball player's future performance while maintaining that height doesn't exist, height is a social construct, height doesn't matter in basketball, and height only determines how well you do on height tests.

I would say China skepticism is driven by skepticism about their government policies. Comparisons to other countries can be useful, but they are certainly not the main driver of this discussion.

There is lots of evidence that China's autocratic government is wasteful and inefficient, and it has a large role in the economy. The lack of transparency also makes it hard to evaluate how sustainable the current path is, and even how real the growth statistics are.

There must be some limit after which the return on investment for building empty cities comes home to roost. That's the bottom line of my sino skepticism.

But What Would Scott Sumner Say? (BWWSSS?) {pronounced like air rushing out of a tire}
Sumner would say that a China crash is only a true crash if the country *never* reaches the previous peak (that is how Prof SS defines a "crash"--the entity never regains its former peak--otherwise, it's a mere "correction"). And we know from economics the only time that happens is if the country or entity goes extinct. So China skeptics are really saying that China will cease to exist, a point made most forcibly by Gordon G. Chang's book "Coming Collapse of China". But, against this, economists say that democracy is only weakly linked to growth, albeit it is positive ("Barro and Sala-i-
Martin, 2003). Cuberes and Jerzmanowski (2009)"). So democracy is not a necessary nor sufficient condition for growth. Yep, I Google scholar'd it.

If you actually followed Sumner, you would know that he has addressed this point in depth, and that the "ghost cities" meme is very overplayed. Most of the "ghost cities" have already filled up.

You think Chinese excess capacity is not a real thing? Cities or rail or industrial capcity or whatever, you can't keep spending on stuff that has no real return. Stuff that depreciates notably.

Yeah, capital depreciates in value and utility, but prices always goes up.

Otherwise "capital gains" would be a contradiction.

I have no knowledge or opinion on the matter. I meant no more or less than I said.

You know there's such a thing as "capital losses" also? They're the opposite of capital gains.

Longtime China resident here. I think some of the ghost city problem is getting worse. I can point out half a dozen 30+ story skyscrapers in prime real estate shenzhen that are completely empty. And all of these have been built within the past 15 years. Hell, an enormous luxury shopping complex directly across the street from the municipal CCP headquarters just got boarded up this year. Many factory parks have diminished immensely in the past 5 years.

Chinese data, heh. Tread softly on those eggshells.

That's putting it quite mildly.

BTW, Tyler's mom gave me crabs.

The lobster is better.

Interesting that they mention building subways, 4 of the ten busiest systems are in China:

In the 20th century 2 US cities built subways that were abandoned. Wonder how many people at the time thought it was a sign of America's impending crash.

Given that the US had a couple of really bad crashes in the 20th century, they could have been right.

To me it is almost a truism to say that China will have a crash. All countries have them eventually. The really interesting question is what will happen to China politically when it does have the crash. The great depression brought sweeping changes to America. Japan lost an entire decade and to this outsiders perspective has not changed much. Russian economic problems brought down the Soviet empire.

How resilient will China's political system prove to be?

This is a really good observation.

What a CROCK! Obama damaged seriously the economy of USA after the failure of negotiations between USA and UK as to trade agreement! We lost potencial investors! Well..i dont think that obamanomics will lead us to success! :( http://enria.org/index.php/categories/economic-analysis/18151-what-factors-undermine-the-belief-in-successful-signing-the-agreement-on-free-trade-area-between-usa-and-uk

Japans GDP growth per capita since 1990 has been about the same as the rest of the Western world, which can be considered an accomplishment considering they have a more aged society meaning less workers per person.
Japans lost decade is one of the biggest myths out their right along with the 70's being an economic stagnation (70's had GDP per captia growth equal to the 80's and higher the the aughts)

China's oil consumption data suggests the economy is growing in the 3-4% range.

Nearly 8% GDP growth in China would be huge. It would be as much or more than some of the boom years pre-2008 in absolute terms. And yet, when's the last time you can recall reading an article on booming China? About all those Louis Vuitton stores opening, or two power plants a week, or 15,000 km of railroads? Mostly, I read stories about ghost cities, excessive leverage, corruption crackdowns, and lurid murder trials. Where is the press? Have they become blasé about China's adding a Spain worth of GDP every year? Or is it that China's not adding a Spain worth of GDP every year?

Where are you getting that oil consumption data?

Nothing I have seen regarding China's oil consumption suggests such a steep decline. The country just passed the U.S. as the world's leading importer of oil.

It's been 5 years since I've heard someone saying their sales in China are doing well. I guess I have too many incompetent friends.

Dr. Pettis has been predicting the economic sky was about to fall on China for a few years now, but it somehow keeps humming along at 7+% annual growth rates. And these growth rates have been maintained with an appreciating currency.

Several hundred million Chinese have been brought out of agricultural poverty into the urban middle classes in the past 30 years. Maybe Chinese central bankers and fiscal authorities know what they are doing better than Dr. Pettis is willing to acknowledge.

Should the Chinese economy someday slowdown below acceptable levels China will know what to do. They will devalue their currency again. You read it here first.

One of the big educational experience of my teenage years was reading a very well argue (to my teenage mind) book about how Japanese bureaucrats were so smart and farsighted and how Japan would continue to out grow America for the foreseeable future.

What made the book so educational is that I read it after Japan had crashed and was already a couple of years into its long depression. 20 years of great growth does not prove that a political system is full of people who know what they are doing.

Japan still became a rich country with a manufacturing sector on the technological frontier. If that's China's model for economic failure, they will be by far the most powerful country in the world.

That is true. But since when has Dr. Pettis said that China will not become the more powerful country in the world? If China can hold together, it will be the most powerful nation in the world. That is how it has been for most of recorded history.

The argument is about whether its current economic policy is sustainable/wise. Not whether China will become a North Korea.

The problem with this observation is that Japan was at the tech frontier by the 1960s, with a substantial middle class and world leading innovation. China is not yet close to that level, so the middle income trap is a real dilemma. During the Japanese lost decade, they were still selling absurd numbers of Sony TVs and Toyota. I don't think China is similarly insulated in this sense.

@BigEd, the rapid Chinese growth doesn't necessarily prove China has excellent governance. Any country starting as low as China will experience rapid growth as long as it is relatively stable, is open to trade and economic activity, and has at least somewhat functional institutions. Being far poorer than much of the world creates a huge inbuilt trade advantage that produces growth as long as the government doesn't totally screw up.

But now China is starting to reach the end of the low-hanging fruit, and it is far from certain that they can continue growing once they don't have such a big natural advantage. The weaknesses of their institutions may start to become a barrier to progress.

> China’s economy expanded 7.8 per cent in the third quarter

Of course it did.

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