Will China's growth model only cause consumption to decline?
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E-mail Shanghai Daily, May 17, 2012
![[By Zhou Tao/Shanghai Daily]](http://images.china.cn/attachement/jpg/site1007/20120517/001ec949c22b111eb6de04.jpg "[By Zhou Tao/Shanghai Daily]") |
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[By Zhou Tao/Shanghai Daily] |
Editor's note: Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University's Guanghua School of Management.
He published his 12 predictions for the Chinese economy earlier this month, arguing that China will be the last major economy to emerge from the current global crisis.
Shawn Mesaros, managing director of Pacific Asset Management, disagrees. Here is a condensed version of their statements.
Michael Pettis: China will be the last major economy to emerge from the global crisis. My basic argument is that the global crisis was caused by the necessary reversal of the great trade and capital imbalances of the past decade, and a country can only be said to have emerged from the crisis when those underlying imbalances had been resolved.
Since China's contribution to the global imbalances has been its excessively high savings rate, China cannot emerge from the crisis until the high savings rate have been reduced to a more reasonable level.
Shawn Mesaros: Chinese companies experienced a growth recession which was an external demand problem, basically as a result of a depression which was exported from the United States in the form of leverage and is now ongoing in Europe. Fiscal stimulus of epic proportions is required everywhere else in the world to avoid economic collapse. This is not the case in China where consumer demand is extremely strong and growing - replacing much of the Western demand.
It remains our most amazing head-in-the-sand moment that the world believes that someone else outproducing someone else and letting them buy things that they want is somehow unfair. In fact, China is the most responsible of all the G-20 member countries. China both invests at home and saves its money during boom times.
Pettis: Chinese consumption will continue to stagnate or decline as a share of GDP until the growth model is abandoned. By "abandoning" the model I mean that transfers from the household sector to subsidize rapid growth must be eliminated and reversed.
Mesaros: Michael Pettis suggests (as do all Keynesian-based economists) that all the Chinese have to do is stop saving, bankrupt the household sector, and wow, will that ever help the rest of the world!
Pettis: Investment is being misallocated on a massive scale and this is not due to any special Chinese characteristic but rather a fundamental requirement of the way the system operates. Although there are still some economists who disagree that investment is being massively wasted, I think this is so well understood by now that there is no need to belabor the point. People respond to incentives, and for the last decade or longer there has been a strong incentive to keep investment levels high, regardless of their returns. It would be surprising if this did not result in a lot of wasted spending.
Mesaros: Any time you are racing a car and trying to tune it at the same time there is going to be slippage. In America, they call it US$500 toilet seats and US$250 hammers - or Enron, or some other fabulous government-supported idea like Fannie Mae.
That's not just wasted spending - it's lighting fire to cash and cronyism at its best. At least in China the citizens get a bridge or a road or a bullet train. The "relative waste" is a lot smaller over time since American policy has the government investing in paper and in China the government invests in real assets and infrastructure.
Pettis: Debt is rising at an unsustainable pace and debt levels will become unsustainable well before the end of the decade. This follows from the above point; if investment is debt funded and if it is being wasted, then by definition debt must be increasing at an unsustainable pace - ie faster than debt-servicing abilities.
Mesaros: Maybe we should talk about the US$1.1trillion spending deficit that America has every single year; that the USA has "racked up" US$5 trillion in freshly accumulated credit card debt from excessive spending with effectively zero savings.
At least in China there's trillions in foreign exchange reserves which China deploys as quickly as it can to buy real assets.
So who's at the debt limit? Not China. Michael Pettis wishes China would somehow become what it was 20 years ago with 500 percent debt to equity and in need of a trusty IMF loan package.
Pettis: When specific debt problems are identified, resolute attempts by Beijing to resolve them are warmly welcomed by analysts but are wholly irrelevant - because the problem of debt is systemic, not specific. This follows from the above.
The issue is not that specific borrowers may run into debt problems. It is that the run-up in debt is systemic and cannot be prevented as long as China maintains the existing growth model. If there is rapid GDP growth, say anything above 6 percent or 7 percent, debt within the system must be rising at an unsustainable pace.
Mesaros: The Chinese are largely becoming the most productive people on the planet and as such, high-value jobs and services will keep GDP going strong for perhaps another two decades before slowing appreciably ... with clear bumps along the way..
Pettis: As some policymakers gradually became aware of the problem with the growth model and the risk of crisis, a fundamental split emerged between those who demanded rapid reform and those that wanted to maintain control of resources.
The problem is that continuing the growth model will lead to a debt crisis, but abandoning the model will lead to much slower growth, and especially to much slower growth in the accumulation of state sector assets.
Mesaros: A growth model that doesn't happen anywhere else in the developed world is a growth model that the developed world would like to see come to an end. The China model of high infrastructure investment, higher education, production and savings is a winning model which marginalizes the SOLS (super-over-leveraged-sovereigns).
Pettis: Chinese government debt will continue to balloon through the rest of this decade. Privatization is the best way to effect the transfer of wealth from the state sector to the private sector, and would be especially efficient if privatization proceeds were used to extinguish debt.
Mesaros: Because the Chinese are becoming so much better with a balanced economy and savings both at government and consumer level, you have something more sustainable in terms of growth which makes the country more bust-proof, in which case, China is expected to grow the debt outstanding as a sovereign entering the global debt marketplace from a very low level. So we expect rapid growth of debt from a smaller beginning. That's more a positive than a negative.
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