Michael Pettis – Concerned Capital flowing out of China [Interview]

Published on Apr 5, 2016
Michael Pettis Blog http://blog.mpettis.com/
Huge debt adjustment impending in China
Debt problems lead to slow growth
Under fiat currency, debt gets out of control

RMB has strengthened

3:05conversation that added the flavor and spice to that beer Michael Pettis the
3:09conversation continues what I’m curious about is what is market volatility
3:15telling us here in 2016 more than the actual price levels it depends on which
3:21market volatility you’re talking about
3:23market go to the within each other is indeed domestic stock markets reflects
3:29the start the Chinese markets are primarily specular the males have been
3:34really happen in 2015
3:38really sort of the summer of 2014 elizalde Ali is that not only is it
3:43primarily a speculative market for all top of it has been a real convergence of
3:48speculative strategies news basically one strategy and that is if you would
3:53ask most people going to be a rally why they were by Chinese stocks didn’t they
3:59know that the economy was slowing and profitability is coming down their
4:02attorney yes yes we know that but the government is more or less guaranteed
4:07that the stock markets are going to go up but we know the best can’t go on
4:10forever but we’re going to write this incredible and so what’s happened is the
4:17credibility of that guarantee weaken as you would expect to get the complete
4:21collapse the market until the government is able to get it going again but I
4:25really don’t think you can expect any sustained rally in the market because
4:30it’s part 2 jittery and 42 focused on any sort of government signaling in kind
4:35of an intense in the external markets are you think what’s really happening is
4:41not so much that foreigners are correctly interpreting the data coming
4:46out of China because the chinese adjustment is going to be much less
4:51painful for the world that many people expect this to terms with who was
4:55speaking about of course metal producers that have been very badly
4:59will compete to be hurt badly but in general the united states are going to
5:04be but not only affected by the Chinese are just as long as it’s not chaotic and
5:08disruptive but what’s happening there is that there’s sort of this rapid catch up
5:13to the kind of things that you live with discussing for many years it’s taking
5:17awhile I think for people to recognize just how difficult the Chinese
5:21adjustment was going to be and I would certainly lost your so pretty much
5:25everyone is sort of caught up towards china really is there is this issue
5:31massive indebtedness in China and I wonder if it’s possible to avoid the
5:37negative implications of over indebtedness including an increase in
5:40non-performing loans when the financial sector in China is largely guaranteed by
5:47the central bank
5:48well there’s no way to get around it have not been able to find any country
5:53in which debt levels to become high you know that they’ve closed the level of
5:56concern in China and in which the country was ultimately able to grow its
6:01where the historical precedent suggests that China’s not going to grow
6:07significantly it’s certainly not going to grow its way out of its debt until I
6:11get some kind of partial forgiveness on the debt whether this explicit or
6:15implicit and explicit way of course the defaulting to restructure the debt with
6:19a haircut that’s probably not going to happen it’s much more likely is the debt
6:24servicing costs are going to be allocated somehow the other through the
6:28state sector and that it’s mostly the provincial state sector because it’s
6:32really the only group that’s able to absorb the cost of the debt without
6:37significantly negative economic implications bill normally when you have
6:42a problem with the household sector because the school sectors politically
6:47not strong enough to protect themselves and I’m not just talking about china
6:50this would happen USA and Europe and everywhere else but in China that’s how
6:55they sold the last about ten fifteen years ago and during that period
7:01consumption as a share of GDP which started already quite low folder
7:06dramatically the most makes the house will start to clean up dead you can’t
7:11really ask for a surge in house
7:13salt consumption to drive growth so they’re not going to be able to
7:16allocated to the household sector and that pretty much means that they don’t
7:20have to allocated to the state sector that’s politically really tough to do
7:24when we were promised
7:26Beijing would make re-balancing a priority which people forget was all the
7:31way back in 2007 and Premier Wen Jiabao the imbalance was worse than it was
7:36during the period that the phrase vested interests became widely used in the
7:41Chinese cross because it was as they attempted to rebalance but they first
7:46realize the tremendous opposition but would emerge from the provincial the
7:50group referred to here as the US interests so that’s really the issue
7:55about the debt it’s going to be allocated to the provincial elites to
8:00the provincial states are to one or the other but when that happens very hard to
8:04say because it’s politically very difficult to do so what can we do know
8:08is that the longer it takes to do so the more costly the overall just work is
8:12going to be for charter in a recent article in Project Syndicate mention hey
8:18describes the speed and energy on display in the anticorruption
8:21campaigning for the current administration is this president disease
8:26consolidating power enough to sort of overcome the opposition of vested
8:30interests and thus be able to move forward towards that assignment of
8:36losses that you’re describing what he hopes to once again this work presents a
8:40pretty clear the only countries that are able to implement these types of reforms
8:44successfully tend either to be democracy for barry centralized to talk about
8:49these very much like China the 1980 so season centralized power to that point
8:56it’s simply not going to be possible to implement the necessary reforms or is he
9:01there yet I don’t really know and people like we are not going to others are
9:06really limited number of people who have a really good sense of that and all we
9:09can really do is after the fact whether or not the reforms will have said for a
9:15while though classroom particular that this was really the pier 2016 for me was
9:20the key in which we would see the real credible steps implemented by Beijing
9:26process if we don’t see them 2016 I get a lot more nervous would you say that a
9:32signing those losses is easier in an economy like China’s where there’s not
9:37the same democratically driven feedback loop as we have in the USA Europe well
9:42tell you what the historical precedent suggests somebody democracy come to be
9:47pretty good at adjusting in a highly centralized autocracies tend to be
9:51pretty good adjusting the intuition by that’s what makes sense but we do know
9:56is that countries that are sort of in the middle of always fail to implement
10:00these types of jobs or they done so with tremendous political ability to us so
10:06we’re still waiting to see how it turns out in a few years ago the Chinese
10:10economy was held to be superior economic model exhibiting a faster return to
10:15growth following the global financial crisis and it seems the Chinese playbook
10:20then was to drive demand massive government spending now the emphasis is
10:26shifting to the supply-side reagan would believe they

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