Michael Pettis's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/213483/comments http://seekingalpha.com/article/162913-big-losses-are-hidden-on-china-s-bank-balance-sheets?source=feed#comment-687192 687192 Wed, 23 Sep 2009 07:59:37 -0400 http://seekingalpha.com/article/162738-china-the-coming-clash-in-savings?source=feed#comment-687031 687031
Djackson and HaavBline, of course one doesn’t automatically require the other. For example a rise in US savings could be offset by a rise in global investment, or by a decline in European and Japanese savings, but each is unlikely. Global investment is more likely to decline than to rise as a consequence of the crisis and especially once government fiscal expansions reach their limits. Japan’s savings rate has already declined tremendously and Japan and Europe are seeing sluggish growth and rising unemployment, which are unlikely to lead to the necessary rise in consumption to offset the rise in US savings. Other countries are much too small to make a difference, and anyway are mostly all suffering from the global slowdown so are likely to exacerbate, not absorb, the savings imbalance. The rest of the world is actually likely to make the problem worse, not better.

Chap08, I am impressed by your certainty that Jim Walker is wrong – especially since his prediction turned out to be right and everyone else’s wrong. What impresses me less is the logical sequence that assumes that a dollar bloc obviates the problem of rising savings within the member of that bloc. It seems to me that the opposite is true. The more tightly the economies are linked the more important are the mutually offsetting imbalances.]]> Wed, 23 Sep 2009 01:32:21 -0400
Djackson and HaavBline, of course one doesn’t automatically require the other. For example a rise in US savings could be offset by a rise in global investment, or by a decline in European and Japanese savings, but each is unlikely. Global investment is more likely to decline than to rise as a consequence of the crisis and especially once government fiscal expansions reach their limits. Japan’s savings rate has already declined tremendously and Japan and Europe are seeing sluggish growth and rising unemployment, which are unlikely to lead to the necessary rise in consumption to offset the rise in US savings. Other countries are much too small to make a difference, and anyway are mostly all suffering from the global slowdown so are likely to exacerbate, not absorb, the savings imbalance. The rest of the world is actually likely to make the problem worse, not better.

Chap08, I am impressed by your certainty that Jim Walker is wrong – especially since his prediction turned out to be right and everyone else’s wrong. What impresses me less is the logical sequence that assumes that a dollar bloc obviates the problem of rising savings within the member of that bloc. It seems to me that the opposite is true. The more tightly the economies are linked the more important are the mutually offsetting imbalances.]]> http://seekingalpha.com/article/159817-the-shanghai-market-calls-the-tune?source=feed#comment-673189 673189
Michael Xia, thanks for your kind comments, but as for the latter, it is nearly two weeks later and there still is no evidence of any concerted attacks nor evidence of actual syringes. The two clear “syringe” cases involve two junkies holding up a cab, something that probably occurs in every big city on a daily basis, and a junkie getting caught by police while trying to inject himself and then “threatening” the police with the syringe. Of the 106 reported cases (actually more than 500 reported but most of them rejected as groundless), no one has demonstrated that they attacks were caused by syringes rather than pins, knitting needles or (yes, several Urumqi doctors said this) insect bites. There has also been not a single case of a recipient testing positive for poison, AIDS, or anything else. Of course I am sympathetic to any real attacks, but I am also concerned about mass hysteria leading to beatings and deaths, which have already happened, according to police reports. The 19-year-old boy, Yilipan Yilihamuwho, pricked the girl with a pin may be an idiot, and may deserve some punishment, but the hysteria has landed him 15 years in jail – a pretty tough punishment]]> Sat, 12 Sep 2009 05:11:15 -0400
Michael Xia, thanks for your kind comments, but as for the latter, it is nearly two weeks later and there still is no evidence of any concerted attacks nor evidence of actual syringes. The two clear “syringe” cases involve two junkies holding up a cab, something that probably occurs in every big city on a daily basis, and a junkie getting caught by police while trying to inject himself and then “threatening” the police with the syringe. Of the 106 reported cases (actually more than 500 reported but most of them rejected as groundless), no one has demonstrated that they attacks were caused by syringes rather than pins, knitting needles or (yes, several Urumqi doctors said this) insect bites. There has also been not a single case of a recipient testing positive for poison, AIDS, or anything else. Of course I am sympathetic to any real attacks, but I am also concerned about mass hysteria leading to beatings and deaths, which have already happened, according to police reports. The 19-year-old boy, Yilipan Yilihamuwho, pricked the girl with a pin may be an idiot, and may deserve some punishment, but the hysteria has landed him 15 years in jail – a pretty tough punishment]]> http://seekingalpha.com/article/161062-chinas-august-data-confirms-both-optimists-and-pessimists?source=feed#comment-673188 673188
Alphameister, I wonder if you are old enough to remember the same nonsense that was said during the credit-fueled bubble in Japan in 1988 and 1989. And if you really do look closely at Chinese data you may be one of the few who do who nonetheless accepts retail sales as a measure of consumption growth. For the past five years retail sales have always been higher than GDP growth, and yet consumption as a share of GDP has declined, which at the very least is mathematically curious.]]> Sat, 12 Sep 2009 04:55:21 -0400
Alphameister, I wonder if you are old enough to remember the same nonsense that was said during the credit-fueled bubble in Japan in 1988 and 1989. And if you really do look closely at Chinese data you may be one of the few who do who nonetheless accepts retail sales as a measure of consumption growth. For the past five years retail sales have always been higher than GDP growth, and yet consumption as a share of GDP has declined, which at the very least is mathematically curious.]]> http://seekingalpha.com/article/149242-unimpressed-with-chinas-high-reserve-and-gdp-growth-numbers?source=feed#comment-591542 591542
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.]]> Fri, 17 Jul 2009 03:29:49 -0400
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.]]> http://seekingalpha.com/article/149242-unimpressed-with-chinas-high-reserve-and-gdp-growth-numbers?source=feed#comment-591541 591541
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. ]]> Fri, 17 Jul 2009 03:29:22 -0400
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. ]]> http://seekingalpha.com/article/145135-china-can-the-rmb-be-more-undervalued-today-than-it-was-last-year?source=feed#comment-567991 567991
As for your question, much of John Lee's information is (or was) publicly available. The data on the number of incidents of "mass unrest" for example, although probably understated, used to be released by one of the ministries annually until 2005, when the release was discontinued for reasons never explained.]]> Tue, 30 Jun 2009 05:02:32 -0400
As for your question, much of John Lee's information is (or was) publicly available. The data on the number of incidents of "mass unrest" for example, although probably understated, used to be released by one of the ministries annually until 2005, when the release was discontinued for reasons never explained.]]> http://seekingalpha.com/article/145135-china-can-the-rmb-be-more-undervalued-today-than-it-was-last-year?source=feed#comment-563158 563158 Fri, 26 Jun 2009 03:15:33 -0400 http://seekingalpha.com/article/145135-china-can-the-rmb-be-more-undervalued-today-than-it-was-last-year?source=feed#comment-561597 561597 Thu, 25 Jun 2009 07:28:20 -0400 http://seekingalpha.com/article/145135-china-can-the-rmb-be-more-undervalued-today-than-it-was-last-year?source=feed#comment-561592 561592 Thu, 25 Jun 2009 07:25:10 -0400 http://seekingalpha.com/article/140531-why-do-chinese-save?source=feed#comment-526035 526035 Mon, 01 Jun 2009 05:07:29 -0400 http://seekingalpha.com/article/138965-the-coming-of-a-u-s-savings-culture?source=feed#comment-513972 513972
Unexpected inflation benefits borrowers, but expected inflation actually discourages borrowing in part because of high real rates and in part because high nominal interest rates have the impact of accelerating real payments on the debt, making cashflow more difficult to manage. ]]> Fri, 22 May 2009 04:59:53 -0400
Unexpected inflation benefits borrowers, but expected inflation actually discourages borrowing in part because of high real rates and in part because high nominal interest rates have the impact of accelerating real payments on the debt, making cashflow more difficult to manage. ]]> http://seekingalpha.com/article/130135-is-governor-zhou-a-closet-bernanke-ite?source=feed#comment-457295 457295
In the mid-Ming period China experienced a collapse of its money system. This resulted in and was exacerbated by silver hoarding, which became worse after Japan, China’s major source, cut off silver exports in response to declining silver stocks in Japan. Fortunately for China the Spanish colonization of the Americas resulted in massive silver discoveries in the 16th Century and was the main cause of burgeoning trade between China and Europe. China desperately needed silver to re-monetize its monetary system, for which it exported silk, tea, porcelain, and other goods, and European wanted those goods and were willing to exchange it for the suddenly plentiful silver.

In fact historians estimate that one-third of all American silver ended up in China. If China was simply passively accumulating silver as the clearing of its trade surplus, this would have been almost impossible – why would China give up so much real production for passively accumulating silver, and why did the monetary system strengthen rather than collapse? By the way the Qianglong’s “famous reply” probably had to do more with domestic court politics and factional infighting (between “openers” versus “closers”, a long Chinese tradition) than with any real description of trade needs.

By the end of the 18th century, with the drying up of silver from the Americas, the silver drain started to become a serious problem for Europeans, which is when the British hit on the idea of “balancing” trade by exporting Indian opium to China. In fact, contrary to what one would have expected if China merely passively accumulated silver, there is quite a lot of evidence that the Chinese emperor turned against opium imports not because of the deleterious effect on the Chinese people but rather because China’s growing economy and monetary system needed silver, and with the importation of opium the Chinese monetary system began experiencing the consequences of a too-tight monetary conditions.

I think we have to be careful about these kinds of arguments because we assume things are immutable that are not. Until the early 1990s everyone talked about how Asian trade surpluses were the consequence of culture and not monetary and trade policy, but in then until 1997 Asian trae accounts went wildly into deficit until the 1997 crisis scared policymakers into engineering trade-surplus policies. I think policies and economic conditions do matter to the trade account, at least as much as culture does.

As for your import duty proposals, this might have had the effect you say, but it probably would have violated the WTO and would have set a terrible precedent for a country that is eager to encourage free trade.
]]> Thu, 09 Apr 2009 08:10:40 -0400
In the mid-Ming period China experienced a collapse of its money system. This resulted in and was exacerbated by silver hoarding, which became worse after Japan, China’s major source, cut off silver exports in response to declining silver stocks in Japan. Fortunately for China the Spanish colonization of the Americas resulted in massive silver discoveries in the 16th Century and was the main cause of burgeoning trade between China and Europe. China desperately needed silver to re-monetize its monetary system, for which it exported silk, tea, porcelain, and other goods, and European wanted those goods and were willing to exchange it for the suddenly plentiful silver.

In fact historians estimate that one-third of all American silver ended up in China. If China was simply passively accumulating silver as the clearing of its trade surplus, this would have been almost impossible – why would China give up so much real production for passively accumulating silver, and why did the monetary system strengthen rather than collapse? By the way the Qianglong’s “famous reply” probably had to do more with domestic court politics and factional infighting (between “openers” versus “closers”, a long Chinese tradition) than with any real description of trade needs.

By the end of the 18th century, with the drying up of silver from the Americas, the silver drain started to become a serious problem for Europeans, which is when the British hit on the idea of “balancing” trade by exporting Indian opium to China. In fact, contrary to what one would have expected if China merely passively accumulated silver, there is quite a lot of evidence that the Chinese emperor turned against opium imports not because of the deleterious effect on the Chinese people but rather because China’s growing economy and monetary system needed silver, and with the importation of opium the Chinese monetary system began experiencing the consequences of a too-tight monetary conditions.

I think we have to be careful about these kinds of arguments because we assume things are immutable that are not. Until the early 1990s everyone talked about how Asian trade surpluses were the consequence of culture and not monetary and trade policy, but in then until 1997 Asian trae accounts went wildly into deficit until the 1997 crisis scared policymakers into engineering trade-surplus policies. I think policies and economic conditions do matter to the trade account, at least as much as culture does.

As for your import duty proposals, this might have had the effect you say, but it probably would have violated the WTO and would have set a terrible precedent for a country that is eager to encourage free trade.
]]> http://seekingalpha.com/article/128714-china-s-graduates?source=feed#comment-455922 455922 Wed, 08 Apr 2009 08:39:21 -0400 http://seekingalpha.com/article/127630-talk-of-new-reserve-currency-will-probably-lead-nowhere?source=feed#comment-446131 446131
TERN, a more important question is whether other countries would want to hold a significant portion of their reserves in RMB. Twenty years ago anyone with “brains” knew that Japan would be the world’s largest economy, and the yen the dominant reserve currency, by the end of the century. As a famous wag once said, predictions are difficult, especially about the future.

]]> Tue, 31 Mar 2009 08:35:02 -0400
TERN, a more important question is whether other countries would want to hold a significant portion of their reserves in RMB. Twenty years ago anyone with “brains” knew that Japan would be the world’s largest economy, and the yen the dominant reserve currency, by the end of the century. As a famous wag once said, predictions are difficult, especially about the future.

]]> http://seekingalpha.com/article/127630-talk-of-new-reserve-currency-will-probably-lead-nowhere?source=feed#comment-446129 446129
This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.
]]> Tue, 31 Mar 2009 08:31:35 -0400
This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.
]]> http://seekingalpha.com/article/127630-talk-of-new-reserve-currency-will-probably-lead-nowhere?source=feed#comment-446117 446117
This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.
]]> Tue, 31 Mar 2009 08:19:07 -0400
This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.
]]> http://seekingalpha.com/article/124293-premier-wen-china-is-ready-to-significantly-expand-stimulus?source=feed#comment-415490 415490
If you want to see whether or not China has been more agressive in its trade policy, you would probably want to check to see if China's exports have fallen less than those of other Asian countries (it has declined by much less) or whether its trade surplus has declined as quickly as other Asian countries (in fact its trade surplus has surged while others' have declined).

Other Asian countries are claiming that China has been very aggressive about forcing increasing amounts of overcapacity onto the world, thus causing them to bear more than 100% of the adjustment, and so they would not be sympathetic to the argument that China needs to devalue in order to protect it from predatory currency behavior among its competitors. That is why trade relations between China on one side and India, Indonesia and Malaysia on the other have gotten so bad. I suspect those bad feelings will spread.]]> Fri, 06 Mar 2009 04:56:42 -0500
If you want to see whether or not China has been more agressive in its trade policy, you would probably want to check to see if China's exports have fallen less than those of other Asian countries (it has declined by much less) or whether its trade surplus has declined as quickly as other Asian countries (in fact its trade surplus has surged while others' have declined).

Other Asian countries are claiming that China has been very aggressive about forcing increasing amounts of overcapacity onto the world, thus causing them to bear more than 100% of the adjustment, and so they would not be sympathetic to the argument that China needs to devalue in order to protect it from predatory currency behavior among its competitors. That is why trade relations between China on one side and India, Indonesia and Malaysia on the other have gotten so bad. I suspect those bad feelings will spread.]]> http://seekingalpha.com/article/122296-chinese-real-estate-is-in-the-headlines-again?source=feed#comment-404101 404101 Thu, 26 Feb 2009 07:00:30 -0500 http://seekingalpha.com/article/121840-the-u-s-government-frozen-in-the-headlights?source=feed#comment-400965 400965 Tue, 24 Feb 2009 03:09:34 -0500 http://seekingalpha.com/article/115695-contrasting-china-now-to-the-u-s-in-1929?source=feed#comment-363156 363156
The hand, I think China has less monetary independnce than may of us suppose given its current currency regime. I don't want to suggest that there is nothing it can do, but my instinct is that their lack of control on the way up will be mirrored on the way down.

Amouna, for reasons I have discussed in other pieces the fear of whether or not China would support US fiscal expansion are groundless. It is hard to know if China can or should float the currency. After having waited too long they now face significant risks either way.]]> Thu, 22 Jan 2009 12:48:38 -0500
The hand, I think China has less monetary independnce than may of us suppose given its current currency regime. I don't want to suggest that there is nothing it can do, but my instinct is that their lack of control on the way up will be mirrored on the way down.

Amouna, for reasons I have discussed in other pieces the fear of whether or not China would support US fiscal expansion are groundless. It is hard to know if China can or should float the currency. After having waited too long they now face significant risks either way.]]> http://seekingalpha.com/article/114237-as-deficit-countries-contract-can-surplus-countries-be-far-behind?source=feed#comment-352946 352946 Mon, 12 Jan 2009 01:26:03 -0500 http://seekingalpha.com/article/103199-shorting-the-long-bond-the-obama-solution-meets-china?source=feed#comment-296060 296060
Second you say "Thus, while we stand on the verge of a huge increase in US Treasury offerings, the largest buyer has left the trading room." I am not sure how you came to that conclusion. As long as China runs, or wants to run, a trade surplus with the US (and August and September were the two highest surplus months in history), it has no choice but to buy US dollars directly or indirectly. If it stops, its trade surplus with the US disappears. Again, given the importance of its exports to the US, it is pretty unlikely that it will want to do so – on the contrary they are now doing everything they can to shore up exports. In fact while China's reserves continue to surge, there is some circumstantial evidence that they have increased the dollar share of total reserves.
]]> Sun, 02 Nov 2008 02:01:52 -0500
Second you say "Thus, while we stand on the verge of a huge increase in US Treasury offerings, the largest buyer has left the trading room." I am not sure how you came to that conclusion. As long as China runs, or wants to run, a trade surplus with the US (and August and September were the two highest surplus months in history), it has no choice but to buy US dollars directly or indirectly. If it stops, its trade surplus with the US disappears. Again, given the importance of its exports to the US, it is pretty unlikely that it will want to do so – on the contrary they are now doing everything they can to shore up exports. In fact while China's reserves continue to surge, there is some circumstantial evidence that they have increased the dollar share of total reserves.
]]> http://seekingalpha.com/article/102971-china-is-domestic-demand-rising-or-declining?source=feed#comment-295613 295613 Sat, 01 Nov 2008 03:46:39 -0400 http://seekingalpha.com/article/102370-china-now-that-s-volatility?source=feed#comment-293223 293223 Wed, 29 Oct 2008 04:51:53 -0400 http://seekingalpha.com/article/101993-china-bring-on-the-new-financial-order?source=feed#comment-292154 292154 Tue, 28 Oct 2008 00:52:48 -0400 http://seekingalpha.com/article/81988-is-china-s-economy-slowing?source=feed#comment-189601 189601
Meanwhile at a recent high-level meeting it seems that there is increasing concern about an economic slowdown. I think they are right to be concenred, but if this means that they are putting the monetary problems on the back burner, I worry that we might have a real shot at stagflation,Chinese style.

RUFC, anyone who presents a World Bank projection as proof isn't likely to be taken very seriously.]]> Sat, 21 Jun 2008 06:47:05 -0400
Meanwhile at a recent high-level meeting it seems that there is increasing concern about an economic slowdown. I think they are right to be concenred, but if this means that they are putting the monetary problems on the back burner, I worry that we might have a real shot at stagflation,Chinese style.

RUFC, anyone who presents a World Bank projection as proof isn't likely to be taken very seriously.]]>