The ABC of China's dead-slow growth
By Michael Pettis
Beijing-based economist Michael Pettis has carved out through his "China Financial Markets" blog a distinct position with his commentaries on the Chinese economy, notably with his consideration of the difficulties it faces with its necessary rebalancing towards a more consumption-based model. Asia Times Online here draws the attention of Pettis' latest insightful analysis to a wider public.
As analysts and official entities like the World Bank continue to
downgrade their forecasts for medium-term growth in China, I have been asked increasingly often for the reasons I believe that 3-4% average annual growth rates is likely to be the upper limit for China during the adjustment period. In this blog entry I want to explain how I arrived at my numbers.
The analysis is fairly straightforward and those looking for a very complex econometric model are likely to be disappointed, but I have always believed that, unlike physics or cooking, anything in economics that cannot be easily explained to an educated layman with 9th-grade algebra and a little bit of calculus is likely to be useless (and if he knows some probability theory, the most beautiful branch of math in my opinion, he is able to soar).
Before beginning I should make two points. First, for many years I assumed that the "adjustment" period would begin shortly after the beginning of the administration of President Xi Jinping and Premier Li Keqiang, that is, from 2013 or 2014, and would run through the presumed end of their term in 2023.
In fact I may have been overly pessimistic. It now seems to me that China actually began adjusting economically, although in a very limited way, in 2012, when we first started to see growth slow as Beijing became increasingly worried about the astonishing increase in debt.
This probably occurred because the big wage increases in 2010-11, which were counterbalanced by the sharp drop in real interest rates during that period, were finally able to take effect in 2012 when real interest rates rose sharply once again.
Of course whether the adjustment begins in 2012, 2013, or 2014 probably doesn't matter much to the analysis, but it is good news, I think, that it may have started earlier than I originally expected. ... more.
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, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University's School of Economics and Management and, from 1992 to 2001, at Columbia University's Graduate School of Business. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank.
(Reprinted with permission. For Michael Pettis' blog, see here. For original post, see here.