Michael Pettis had an interesting post this week about why there are changes going on in China for the better. I bring it up because I see a lot of people who are “waking up” to the notion that China has big problems in store. In fact, that fate has yet to be determined, or so Pettis’ argument goes.
To remind everyone, there has been huge over-investment and misallocations of capital in China that can be traced back to three things: (1) financial repression; (2) an undervalued currency; and (3) weak wage growth relative to worker productivity. In each instance, Pettis makes the case that changes have taken place to begin dealing with these items, even if more work still needs to be done.
With respect to too-low interest rates and working to benefit exporters and borrowers over consumers and lenders, what was once a 10+% spread between nominal GDP growth rates and lending rates is now more like 1.5% or less. As such, it becomes much harder to justify borrowing and investing in anything that moves to capture a much smaller spread.
On the topic of an undervalued currency, the Yuan has appreciated by roughly 40% against the dollar within the last decade. The problem has dissipated.
And, finally, as it relates to wage growth, they’ve actually had some. While at the same time there have been real questions about just how much productivity growth there really was. So, maybe that problem is less pronounced than it once was.
None of this is meant to suggest that there is smooth sailing ahead. There is a lot of bad debt to work through and vested interests who remain committed to the status quo. Nevertheless, the “hard landing” and “social unrest” outcomes are not a foregone conclusion. Still, we need to keep a watchful eye for continued reform and meaningful change.
