Michael Pettis: The Limit to China’s Growth
May 12, 2015
by Robert Huebscher
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For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
Nobody really knows what is going on in China, according to Michael Pettis. “Those who know aren’t talking,” he said, “and those who don’t are.”
But Pettis is someone who knows a lot. He predicted China’s slowdown and the resulting crash in commodity prices. One of the most respected scholars on China, he is a professor of finance at Guanghua School of Management at Peking University in Beijing.
Pettis spoke on May 1 at the Strategic Investment Conference in San Diego, sponsored by Altegris and John Mauldin.
Faced with an incredibly difficult rebalancing challenge – one which very few developed countries have overcome – Pettis said that the best China can achieve is 3% to 4% GDP growth.
I’ll discuss the three things China is trying to accomplish and the two ways Pettis said it can achieve its goals. I’ll conclude with Pettis’ thoughts about the implications for investors in China’s economy.
China’s three goals
China and its central bank, the People’s Bank of China (PBoC), are trying to accomplish three things, Michael Pettis said:
- Credit growth must slow from its unsustainable pace. Because most of the credit goes into investment, investment as a share of GDP is at its highest level ever and that complicates this goal. Pettis cited Hyman Minsky’s writings on the structure and the role of debt. “Overly indebted countries have never seemed to grow,” Pettis said. The reason, according to Minsky, is that dependence on debt for investment leads to a very volatile economic environment.
- Unemployment must be prevented from rising.
- The national balance sheet must be repaired.
All measures China is now undertaking, from its anti-corruption campaign to PBoC’s moves that resemble quantitative easing, are aimed at accomplishing a combination of those three things, Pettis said.
“The bad news,” according to Michael Pettis, “is that it’s not going to work.”
China cannot accomplish all three of its goals. It may be able to slow credit growth, he said, but not without an increase in unemployment or damage to its balance sheet.
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