Michael Pettis Talks About China's Future

Michael Pettis, professor of finance at Peking University’s Guanghua School of Management and author of the China Financial Markets blog, has just been interviewed by the Geoff Dyer, FT’s Beijing Bureau Chief on a number of China-related issues. The three-part interview is not only topical, but also excellent viewing material.

Part 1:

Pettis discusses where China may diversify its foreign exchange reserves and whether the renminbi will become the global reserve currency.

Click here or on the image below to view the video.

Part 2:

Pettis discusses the lessons other countries can learn from China’s growth model and its handling of the financial crisis.

Click here or on the image below to view the video.

Part 3:

Pettis discusses the pros and cons of the “Asian development model” and the future of US-China trade relations.

Click here or on the image below to view the video.

Source: Geoff Dyer, Financial Times, September 21, 2009.

Comments

[Glen88]

Thanks for posting that. Michael offers a refreshingly pragmatic opinion.

2009 Sep 24 12:35 AM

[tripleblack]

Well, we will see what develops over the next few years - or even months.

With China rolling over the $200billion in bonds currently keeping 4 big Chinese banks solvent instead of redeeming them, essentially kicking that can down the road, and with the non-performing assets propping up those bonds pretty much fantasy, this is a good test of the accuracy of many portrayals of the economic conditions behind the Wall of China.

2009 Sep 25 02:22 PM

[David White]

tripleback: I agree that there are a lot of questions in China's immediate future. They simply cannot have expanded as rapidly as they have without making some very questionable loans. When everything is going great, that isn't a problem. However, in a slow down, past "looseness" can come back to haunt you. When the road starts getting a llttle rocky, the problems start showing up. I am inclined to think there may be a large number of non-performing loans in China's future. This could eventually lead to a seize up of China's financial system such as we recently saw in the US.

If you just look at China's most recent monthly data you can see the most likely future problem. China's exports fell 23% last month. The trade surplus fell 45%. This has been a continuing trend lately. The Industrial Production grew 12.3%. You have to wonder where that extra production is going to go?? It would seem that there isn't anywhere for it to go. It would seem that deflation is likely in China's future.

Roubini says the character of the Chinese consumer has not changed. Admittedly retail sales were 15+% higher. However, the Chinese consumer has only been buying more because of the stimulus. The government has given out vouchers, etc. The government has also funded many projects which needed materials (for example, steel products produced from iron ore). This part of the demand picture will disappear relatively soon. Then what will China do?

China will have increased production even more to pull itself out of its slowdown (which was very good growth for most economies). Yet China's markets will have shrunk. The Chinese export market is clearly trending downward. The US and Europe are slated to grow slowly if at all for the next two years. Unemployment in those countries is predicted to worsen before it gets better. Unemployment is predicted to stay high well into 2011. China's stimulus won't last that long. If China finds there is virtually no growth in the US and European markets over the next two years, where will it sell its ever increasing production? It cannot sell it to Europe and the US without serious dumping. This would bring retaliatory measures. It cannot sell it internally because the Chinese are not going to change their spending habits that quickly. This means there will be a lot of left over production. This means deflation. It means a Chinese slowdown or recession. How can it mean anything else?

China has benefitted from being financed by western money via the Chinese trade surplus. If that surplus is reduced (or removed entirely), how will the Chinese growth continue to be funded? Will the Chinese even want to continue to try to grow that quickly without bigger markets for their products? Sure there are nouveau riche Chinese who will spend more. However, China is still worker driven, and the workers are not likely to change their habits easily. They work too hard for what little they get.

Stop to admire what China has accomplished in the last ten years. The growth and development of the economy has been phenomenal. Then stop to consider where China is likely to go on the very dangerous roads of today. It is tantamount to sending a child on a long journey alone. The child may survive, but there will be mistakes aplenty. There will be troubles all the way along the path.

The Chinese face increasing bad loans, which will get worse as the Chinese economy likely slows next year. China faces the deflation through to much production problem. Deflation will ensure there are higher levels of bad loans. All one has to do is look at the US housing industry to see that.

China faces the high unemployment problem. They face the near term end of their growth because the world economy will not grow quickly for a long time (say 2+ years), and China had really already been out stripping the world growth before these recent problems. The world economy will not grow enough to provide its normal percentage of buying for the now quickly expanding Chinese industrial output.The Chinese face trade wars if they decide to dump their excess production in the US and Europe.

The numbers for a continued Chinese expansion in the near term just do not add up. Barring some really insane behavior by US and European consumers, the Chinese economy is on the precipice of a cliff! It is leaning out too far! I can see it falling easily. What could possibly stop this? The Chinese worker may be the only one with the power. My bet is that worker is not going to help. That worker is going to save for a rainy day -- not consume maniacally. My bet is the Chinese banks will reap the disasters of too rapid expansion. Exactly when this happens seems to be the only question that really has yet to be decided. The latest numbers are ominous though.

One cannot simply be awed by the industrial production growth number any longer. One now has to ask, where is that production going? The answer seems to be no where (or I don't know). This was going to happen anyway as the Chinese expanded faster than the rest of the world's demand for their products. With the recession, the Chinese have in one fell swoop passed world demand for their products. China will survive of course. It is the same country that has grown phenomenally. However, the pain in the near future will be plain for all to see

2009 Sep 25 07:06 PM

[ThetaTrade]

Great comment, David. Thanks.

2009 Sep 25 07:11 PM

[Moon Kil Woong]

What China does or does not do regarding its foreign reserve holdings is not the biggest issue. Cartainly if they want to control/manipulate the RMB they will need US dollars to do trade with or else the RMB will start to migrate to a more realistic value.

The bigger issue is it's continued trade surplus and their maintaining a domanant hold on manufacturing in many industries. After all, as Adam Smith would point out, it's not what you have it's your capacity to make that determines the wealth of a nation. It's best for the US not to forget its capitalist roots.

We dominate the high end but our ability to produce and factors of production are being seriously challenged whether or not we misbehave with our federal deficit or allow terribly mismanaged financial corporations run us into the ground. The reason is clear. We have put ourselves in a unteniable situation where we can't afford to produce anything. We have done so to benefit from unnaturally low inflation by importing cheap products overseas even though the Fed's monetary policy has been too lax for about 2 decades at least.

Sooner or later we need austerity and a return to a balance between what we make, what we import and export, and what we buy. Preferrably this is best done when we are doing much better than now. All too predictably, usually when we are better off no one wants the good times to end.

2009 Sep 26 10:10 AM

[Teutonic Knight]

Sir -

I think I would have to respectfully disagree with your statement "...We dominate the high end but..." Do we really "dominate" that?

Take for example, optics high-end, do we dominate that premium camera high-end against Germany and Japan? Think about the Nikkon. Another example is auto. The high-end arguably again is being dominated by Germany and Japan as cars like the BMW, Mercedes, Lexus, and Acura, to name a few. On commercial aircraft I would say we are just about even with Airbus. On consumer electronics, we conceded the high-end a long long time ago when RCA alike vanished from the competition.

We have a lead in the military high-end if that is what you mean to say. I believe the estimate of late of lur military goods is ONLY approximately $60, not a whole lot and big number compared with our ~ $500B annual defense budget excluding the supplemental budget for the Iraq and Afghan wars.

Would you care to comment on my comments?

TK


On Sep 26 10:10 AM Moon Kil Woong wrote:

> What China does or does not do regarding its foreign reserve holdings
> is not the biggest issue. Cartainly if they want to control/manipulate
> the RMB they will need US dollars to do trade with or else the RMB
> will start to migrate to a more realistic value.
>
> The bigger issue is it's continued trade surplus and their maintaining
> a domanant hold on manufacturing in many industries. After all, as
> Adam Smith would point out, it's not what you have it's your capacity
> to make that determines the wealth of a nation. It's best for the
> US not to forget its capitalist roots.
>
> We dominate the high end but our ability to produce and factors of
> production are being seriously challenged whether or not we misbehave
> with our federal deficit or allow terribly mismanaged financial corporations
> run us into the ground. The reason is clear. We have put ourselves
> in a unteniable situation where we can't afford to produce anything.
> We have done so to benefit from unnaturally low inflation by importing
> cheap products overseas even though the Fed's monetary policy has
> been too lax for about 2 decades at least.
>
> Sooner or later we need austerity and a return to a balance between
> what we make, what we import and export, and what we buy. Preferrably
> this is best done when we are doing much better than now. All too
> predictably, usually when we are better off no one wants the good
> times to end.

2009 Sep 28 08:11 PM