Having read two books recently on the Chinese economy (albeit by the same author), here is my understanding of what’s going on:
-China’s growth has been highly dependent on liquidity and cheap capital (not necessarily cheap labor). And the resulting emphasis on investment has come at the expense of the household sector – in the form of too low interest and deposit rates, an undervalued currency that benefits exporters and manufacturers over everyone else, and lackluster wage growth relative to worker productivity.
-In any such setting, the risk of overinvestment and misallocated capital goes up exponentially. Basically, there are losses that will need to be taken at some point, it’s just that the continued investment to keep growth rates up papers it over…for a while. But not indefinitely.
-The imbalances need to be corrected by allowing consumption as a share of the economy to grow. However, in order for that to happen, investment will need to come down and GDP with it. People seem to believe that such a strategy of lower growth will lead to political chaos. But, if the household sector is benefitting, there is no necessary causation.
-Pettis’ suggestion is to have the state sell assets to pay down debt so that the weight of responsibility does not fall on the household sector. But, the subsidized classes, political insiders and party members are not keen to swallow that pill. So, while many in China talk a good game about change, let’s hold off judgment until we actually see what gets implemented.
