Michael Pettis

Unimpressed with China’s High Reserve and GDP Growth Numbers

Johngh, although confidence is of course important, I think the world requires a lot more than that. There has been a significant and unsustainable leveraging of household balance sheets in the US and until that process has been sufficiently unwound I think we will continue to see a slowdown in US consumption growth. And it is precisely this slowdown in US consumption growth that will make it so hard for China, whose stimulus involves a big bet on a rapid recovery of the US ability to run large and growing trade deficits, to sustain the growth.

Sober realist, the savings rate is probably declining if fiscal debt were correctly counted. More importantly, the Chinese savings rate has no choice but to decline. As long as the US had very low savings rates that fed into consumption that exceeded production, China could run the opposite position, but with the rise in US savings, unless we see a real surge global investment we are going to see non-US savings decline, either via a decline in the savings rate or a decline in GDP. With Japan and China accounting for most of the increase in savings when US savings declined, I expect they will see most of the decline as US savings rise.