Michael Pettis, professor Beijing University
1930s Germany and Soviet Union,
China uses the Gerschenkron’s model
The model postulates that the more backward an economy is at the outset of economic development, the more likely certain conditions are to occur: Special institutions, including banks or the state, will be necessary to properly channel physical capital and human capital to industries. Gerschenkron’s model
or the high savings high investment model: high investment needs that exceed domestic savings, so they use international investment
-creates a gap between investment and domestic savings. investment = domestic savings + foreign investment, but this is risky and uncerrtain
-a better way is to keep more savings within the country, to have a high savings rate, increase % that goes to businesses, or to the rich or to the government -> automatically increases the savings rate
-when you have high investments needs, a good thing
-> rapid growth of ordinary people, screwing regular people but with high growth, they also have increased wages
-when your investment requirements slow down, you should close the gap between high investment needs and giving the people more of their share, but this means giving more power and money to the people
-instead governments continue this investment heavy policy and these investments become not as productive, and you need to finance it with gov’t debt
-China maxed out heavy investment 10-15 years ago (2005-2010). but has not been able to shift, investment is way too high, much of it is non-productive -> high artificial growth rates that are not real and a huge surge in debt
-demographics: after 1949 China had a baby boom, fewer working people, high dependency ratio, then had a working population boom, working share of population very high (2010), but now peaked and reversing, but this is a long-term problem
-consumption in China vs GDP is one of the lowest in the world, because household income share also the lowest in the world
-China needs to shift income from local govt’s to households
-when household income rises, consumption will also rise, ideally consumption rises more quickly than population declines -> growing consumption, drives the economy
-Beijing wants to constrain growth in debt and increase growth in other ways: reduce debt in non-productive areas (real estate, infrastructure). due to covid consumption and business investment have all contracted
-to switch economic models, bring down debt from non-productive sources, replace with other resources: investment, consumption, trade surplus
1. -can’t add more productive investment, too much capital in China right now
2. -could increase consumption but this means increasing household income share and reducing government share, but politically difficult to do, political power will shift to consumers
3. -bring down bad investment, replace with growing trade surplus, but China is way too large. China’s trade surplus is already too large, rest of the world will not tolerate it
4. -bring down bad investment, replace with nothing -> growth will be very slow sharply
-he says #4 is what China will do
-debt financed investment must stop, cannot go on forever, must deleverage property sector and infrastructure
-expectations of high growth -> preparation by companies for high growth, all this becomes embedded into growth expectations, why build more buildings, because China is growing at 10 %, why is China growing at 10%, because they are building new buildings. As growth rate slows, expectations slow, further increasing downward pressure on growth. Upward growth always exceeds expectations, downward trend always exceeds expectations
-problem in China is demand side and not supply side, but most projects now are supply side, making the imbalance worse. quite difficult to switch a successful development model to sth else
-30:55 most likely outcome for China is 10-20 years of Japanese-style stagnation, growth rates of 2-3%, could be less