The subtitle is China’s Economic Restructuring and the author is Michael Pettis (2013).
Hits on many of the same themes as the other book that I recently read by the writer, but this time he focuses squarely on the imbalances in China and what needs to be done. The basic thesis is that China’s growth is investment-driven, which results in a tendency towards overinvestment and misallocation, leading to unsustainable levels of debt. China has a high savings rate as a result of repressed consumption and a transfer of wealth from the household sector – the enablers are very low interest rates, an undervalued currency, and slow wage growth, all which function as a subsidy to the state and elites. Pettis’ view is that consumption must grow at the expense of the state, otherwise China is headed for a debt crisis. His preferred plan is one where the state privatizes assets and uses sale proceeds to pay down debt, all the while allowing the consumption share of GDP to grow.
His case is pretty solid and he makes some pretty interesting points. Such as, that the question of whether a country borrows in foreign currency is irrelevant to whether a country will face losses, the only thing to focus on is whether the investments that have been made are economically viable. And, as all of it evolves in China, capital flight by elites is an important tab to keep an eye on – as an indicator of rising instability in the banking system and the end of the line for China’s growth model.
