|
Editor's note: Michael Pettis is a Senior Associate at the Carnegie Endowment forInternational Peace and a finance professor at Peking University'sGuanghua School of Management. He published his 12 predictions for the Chinese economy earlierthis month, arguing that China will be the last major economy toemerge from the current global crisis. Shawn Mesaros, managing director of Pacific Asset Management,disagrees. Here is a condensed version of their statements. Michael Pettis: China will be the last major economy to emerge from the globalcrisis. My basic argument is that the global crisis was caused bythe necessary reversal of the great trade and capital imbalances ofthe past decade, and a country can only be said to have emergedfrom the crisis when those underlying imbalances had been resolved. Since China's contribution to the global imbalances has been itsexcessively high savings rate, China cannot emerge from the crisisuntil the high savings rate have been reduced to a more reasonablelevel. Shawn Mesaros: Chinese companies experienced a growth recession which was anexternal demand problem, basically as a result of a depressionwhich was exported from the United States in the form of leverageand is now ongoing in Europe. Fiscal stimulus of epic proportionsis required everywhere else in the world to avoid economiccollapse. This is not the case in China where consumer demand isextremely strong and growing - replacing much of the Westerndemand. It remains our most amazing head-in-the-sand moment that the worldbelieves that someone else outproducing someone else and lettingthem buy things that they want is somehow unfair. In fact, China isthe most responsible of all the G-20 member countries. China bothinvests at home and saves its money during boom times. Pettis: Chinese consumption will continue to stagnate or decline as ashare of GDP until the growth model is abandoned. By "abandoning"the model I mean that transfers from the household sector tosubsidize rapid growth must be eliminated and reversed. Mesaros: Michael Pettis suggests (as do all Keynesian-based economists)that all the Chinese have to do is stop saving, bankrupt thehousehold sector, and wow, will that ever help the rest of theworld! Pettis: Investment is being misallocated on a massive scale and this isnot due to any special Chinese characteristic but rather afundamental requirement of the way the system operates. Althoughthere are still some economists who disagree that investment isbeing massively wasted, I think this is so well understood by nowthat there is no need to belabor the point. People respond toincentives, and for the last decade or longer there has been astrong incentive to keep investment levels high, regardless oftheir returns. It would be surprising if this did not result in alot of wasted spending. Mesaros: Any time you are racing a car and trying to tune it at the sametime there is going to be slippage. In America, they call it US$500toilet seats and US$250 hammers - or Enron, or some other fabulousgovernment-supported idea like Fannie Mae. That's not just wasted spending - it's lighting fire to cash andcronyism at its best. At least in China the citizens get a bridgeor a road or a bullet train. The "relative waste" is a lot smallerover time since American policy has the government investing inpaper and in China the government invests in real assets andinfrastructure. Pettis: Debt is rising at an unsustainable pace and debt levels willbecome unsustainable well before the end of the decade. Thisfollows from the above point; if investment is debt funded and ifit is being wasted, then by definition debt must be increasing atan unsustainable pace - ie faster than debt-servicing abilities. Mesaros: Maybe we should talk about the US$1.1trillion spending deficitthat America has every single year; that the USA has "racked up"US$5 trillion in freshly accumulated credit card debt fromexcessive spending with effectively zero savings. At least in China there's trillions in foreign exchange reserveswhich China deploys as quickly as it can to buy real assets. So who's at the debt limit? Not China. Michael Pettis wishes Chinawould somehow become what it was 20 years ago with 500 percent debtto equity and in need of a trusty IMF loan package. Pettis: When specific debt problems are identified, resolute attempts byBeijing to resolve them are warmly welcomed by analysts but arewholly irrelevant - because the problem of debt is systemic, notspecific. This follows from the above. The issue is not that specific borrowers may run into debtproblems. It is that the run-up in debt is systemic and cannot beprevented as long as China maintains the existing growth model. Ifthere is rapid GDP growth, say anything above 6 percent or 7percent, debt within the system must be rising at an unsustainablepace. Mesaros: The Chinese are largely becoming the most productive people on theplanet and as such, high-value jobs and services will keep GDPgoing strong for perhaps another two decades before slowingappreciably ... with clear bumps along the way.. Pettis: As some policymakers gradually became aware of the problem withthe growth model and the risk of crisis, a fundamental splitemerged between those who demanded rapid reform and those thatwanted to maintain control of resources. The problem is that continuing the growth model will lead to a debtcrisis, but abandoning the model will lead to much slower growth,and especially to much slower growth in the accumulation of statesector assets. Mesaros: A growth model that doesn't happen anywhere else in the developedworld is a growth model that the developed world would like to seecome to an end. The China model of high infrastructure investment,higher education, production and savings is a winning model whichmarginalizes the SOLS (super-over-leveraged-sovereigns). Pettis: Chinese government debt will continue to balloon through the restof this decade. Privatization is the best way to effect thetransfer of wealth from the state sector to the private sector, andwould be especially efficient if privatization proceeds were usedto extinguish debt. Mesaros: Because the Chinese are becoming so much better with a balancedeconomy and savings both at government and consumer level, you havesomething more sustainable in terms of growth which makes thecountry more bust-proof, in which case, China is expected to growthe debt outstanding as a sovereign entering the global debtmarketplace from a very low level. So we expect rapid growth ofdebt from a smaller beginning. That's more a positive than anegative. The e-commerce company in China offers quality products such as China Trapezoidal roll forming machine , China Shutter door machine, and more. For more , please visit Floor deck machine today!
Related Articles -
China Trapezoidal roll forming machine, China Shutter door machine,
| 
