Michael Pettis

Unimpressed with China’s High Reserve and GDP Growth Numbers

Alan, I am not giving stock advice because that involves timing. I expected that after the 1987 crash Japan’s economy would get into serious trouble, but it enjoyed another 2 years and more of bubble conditions and high growth before the final adjustment took place. I think the same may happen in China. And as one of my Columbia professors assured me before I became a trader, “never short a bubble.”

Roma, you would probably have been wiser to say “I disagree” rather than “wrong”. First, you have obviously assumed that once you put money in a bank it disappears from the economy forever. Strangely enough banks actually use deposits to fund investment, which directly or indirectly ends up in USG bonds. As a rule you should assume money invested continues to exist, and figure out the subsequent cashflows. Second, even a very brief familiarity with balance of payments economics would have made you realize that if Americans do not buy Chinese goods, and so China does not run a trade surplus with the US, the whole question of whether China should buy US bonds becomes moot. They cannot. Third, I am a little surprised that you think China has so much lower debt level than the US. Since total government debt in China is considered a state secret I am curious how you got your numbers – what are your sources? Perhaps you think that the official debt numbers in the US are as representative of total US debt as the official debt numbers in the China represent total Chinese government debt? And third, as to why they can’t go on borrowing for 5-10-15 years more, in 1997 Argentine government debt was lower than the US, but strangely enough they only were able to continue borrowing for three more years before defaulting. The amount of debt, the structure of the debt, and the volume of new borrowing would, I suggest, have something to do with all of that. I would suggest that when new banks loans are growing at 25% of GDP every six months, even ignoring the rise in central, provincial and municipal debt, the answer as to why they can’t continue for 3 years, let alone 15 years, should be pretty clear.