Carnegie Endowment for International Peace
Pettis, an expert on China’s economy, is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
From 2002 to 2004, he also taught at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs.
Pettis worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the sovereign debt trading team at Manufacturers Hanover (now JPMorgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was managing director principal heading the Latin American capital markets and the liability management groups. He has also worked as a partner in a merchant-banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team.
In addition to trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
He formerly served as a member of the Board of Directors of ABC-CA Fund Management Company, a Sino–French joint venture based in Shanghai. He is the author of several books, including The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy (Princeton University Press, 2013).
Both Washington and Beijing treat rising debt as a consequence of irresponsible behavior by local institutions. But in China and the United States, rising debt is spurred by policies that have encouraged distortions in the distribution of domestic income. Until these distortions are addressed, both countries must choose between rising debt and rising unemployment.
Beijing’s economic policymakers largely accept that China must rebalance its economy so that growth is driven more by domestic consumption and less by investment. But once China begins to take seriously the need to rebalance its economy, China’s annual GDP growth is unlikely to exceed 2–3 percent for many years, unless there is a substantial increase in the growth rate of consumption.
Policies are not “protectionist” because they violate WTO trade rules. They are protectionist if they distort global trade by generating beggar-thy-neighbor trade surpluses. Because large, persistent trade imbalances would be all but impossible in a well-functioning global trading system, the irony is that U.S. policies to reduce its deficit actually enhance free trade.
China’s large structural trade surpluses are the consequence of internal economic imbalances, which means that any external pressure that results in a contraction of its trade surplus must be accommodated by shifts in these internal imbalances.
In the first half of this two-part blog post, I discussed the problems affecting four rural banks in Henan and the subsequent mortgage boycott in parts of China. In the second half, I argue that these crises need to be seen not as isolated events but rather as signs of systemic problems that reveal a great deal about China’s finances and balance sheet.
The Chinese economy has been wracked by rural bank defaults and boycotts over mortgage payments. In the first half of this two-part blog post, I will explain these events and what they reveal about the health of Chinese markets. In the second part, I will discuss some of the crisis’s systemic implications.
There is increasingly a consensus in Beijing that China’s excessive reliance on surging debt in recent years has made the country’s growth model unsustainable. Aside from the economy’s current path, there are only four other paths China can follow, each with its own requirements and constraints.
Giving up use of the U.S. dollar for global trade and reserve accumulation would be very difficult for U.S. adversaries and would require major economic adjustments, though it would be in the best long-term interests of the United States for the global use of the dollar to be more constrained.
Most economists have trouble understanding why too much debt may harm an economy, let alone how much debt counts as too much. To make matters worse, the common practice of comparing vastly different countries’ debt-to-GDP levels is not a useful tool for gauging how a particular economy is likely to manage its debt burden.
Chinese leaders know that they want to discontinue the country’s existing growth model, but they haven’t yet landed on what the sustainable alternatives are. Beijing’s new common prosperity policy will only help shift domestic demand at the margins, but a full-fledged rebalancing will require a more radical transformation.
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