Michael Pettis

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Michael Pettis
About the author:

Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management.

China Reforms: Why Maintaining High Economic Growth Is Impossible

Date: 7 January 2014

If China is serious about implementing the reforms introduced last November, it must accept that economic growth is more than likely to slow down. Claims that the economy can still continue to grow at above 7% not only misunderstand the nature of China’s transformation, but ignore the history of previous similar growth miracles.

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When Are Markets Rational?

Date: 2 December 2013

The Nobel Committee created quite a stir last month when it awarded its annual prize for economics to three individuals. One of the recipients, Eugene Fama, had received the award for saying that markets are efficient at capital allocation; while another, Robert Schiller, received the award for saying they are not. So which is it, or is the truth really somewhere in between?

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China’s Hidden Debt Problem: An Unavoidable Crisis In The Making?

Date: 24 October 2013

Estimates for China’s local government debts are now close to $3.3 trillion. Some analysts though believe that the government need not be duly concerned about rising bad debts in its banking sector, as their central bank’s extensive foreign reserves is easily enough to recapitalize the banks. What these analysts fail to understand is that these reserves were not accumulated merely by savings, but also involved more borrowing by the People’s Bank of China.

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How China Can Rebalance Its Economy Within A Decade: Michael Pettis

Date: 6 September 2013

China’s great rebalancing act has begun. But how successful and orderly the rebalancing process will be will depend on how realistic the government are in their growth projections. What is clear is that China can no longer accommodate 7-8 percent annual growth if it truly hopes to cure its severe domestic imbalances.

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Is Urbanisation China’s Next Engine Of Growth?: Michael Pettis

Date: 29 August 2013

As part of its demographic blueprint, China intends to move hundreds of millions more people out of the countryside and into its metropolises. Urban migration is expected to create a surge in demand for housing and infrastructure, so much so that the bulls have singled out urbanisation as the engine that will power China’s future development, justifying sky-high investment levels, and even propelling a long-sought switch to a more sustainable consumption-driven growth model. But does urbanisation cause, or accommodate growth?

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On China, Are Foreigners Always Ignorant And Therefore Wrong?: Michael Pettis

Date: 13 August 2013

There have been many cases in which foreigners were able, perhaps because they tend to be more objective, to identify risks earlier than locals. Despite the claims of the traditional China bulls, there is a great deal of worry among China economists living and working in China about the sustainability of the current growth model, and top officials too have made it obvious that they see the need for reform as urgent

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Can China Continue To Spend Its Way To Growth?: Michael Pettis

Date: 15 July 2013

The slew of economic data released last week has confirmed the worst fears of many global investors: China is serious about rebalancing its economy and growth rates of 6 – 7 percent will no longer be encouraged. Attempts to keep growth above that level will simply mean that it will take much longer for China to fix the underlying problems in its economy, that the costs will be much greater, and that the risk of a disorderly crisis will increase. 

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Did Germany Force The Eurozone Into The Debt Crisis?: Michael Pettis

Date: 12 June 2013

As monetary policy across the eurozone was made to fit German needs, excess German liquidity – accumulated from years of trade surpluses and policy controls – was easily exported into Spain and other peripheral European countries which all saw their trade deficits expand dramatically.  In fact, the subsequent imbalance became so large that it led almost inevitably to the European crisis in which we are today.

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Will Slowing Investment Drag China’s Reform Efforts?: Michael Pettis

Date: 14 May 2013

China wants to raise its disproportionately small share of consumption as the cornerstone effort to close one of the world’s widest income gaps and quell rising discontent among those who feel they have missed out on the country’s blistering expansion of the last three decades. Consumption growth is itself dependent on investment growth, and this is more true in the inland provinces than the urbanised coastal regions. But will China be able to maintain consumption growth once investment growth is sharply reduced? 

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Will China Succeed In Its Self-Imposed Revolution?: Michael Pettis

Date: 15 April 2013

In a system in which almost all the growth is driven by increases in investment, and in which an increasing share of investment is being wasted on factories, bridges, real estate, airports, and other projects that have little or no economic value, rising debt can be a very worrying problem since the ability to service that debt is rising much more slowly than the debt. But if Beijing wants an economic revolution without soaring debt, what exactly are they going to do?

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Central Banks Cannot Fix Europe’s Solvency Crisis: Michael Pettis

Date: 9 April 2013

Except for lower debt refinancing costs, the fundamentals of peripheral eurozone economies have not improved in the last six months. At best they are unchanged, but they are probably worse. The region’s crisis continues to be just a liquidity crisis as far as policymakers are concerned – and not caused by problems in the “real” economy. But is peripheral Europe really suffering primarily from a liquidity crisis? When do we call it a solvency crisis?

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Global Rebalancing for Sustainable Growth: Michael Pettis

Date: 19 February 2013

In 2012, we saw the end of what some call the first stage of the global financial crisis. Most of the deepest problems have been identified and market reforms are underway to ensure that economic imbalances reverse themselves. But whether the imbalances reverse in an orderly or disorderly manner will depend on political decisions, decisions that will set the stages for future growth or future stagnation. 

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Trillions of Dollars Missing from China’s Economy: Michael Pettis

Date: 25 January 2013

The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy, not to mention individuals, that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions. But it is certain that not everyone in China is confident that Beijing will be able to force through the reforms that are widely accepted as necessary without a serious fight, as reports suggest that nearly 6 trillion dollars left the economy illicitly over the last decade.

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China Will Struggle To Wean Its Addiction To Investment-Led Growth: Michael Pettis

Date: 3 January 2013

According to an IMF study released late last year, there is now strong evidence that China has been over-investing significantly over the last decade – leading to sustained economic growth rates at the expense of a suppressed consumption base. But even as China embarks on a new era of economic rebalancing, any attempt to reduce its reliance on investment-led growth may cause severe economic repercussion, while doing nothing may also lead to further financial fragility.

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Has the Chinese Economy Bottomed Out?: Michael Pettis

Date: 11 December 2012

The big news in the last few weeks has been the relatively positive economic data suggesting that Beijing could be in for a rebound. However, the “relief” data tell us nothing about the health of the underlying economy. In fact, growth rates in China will continue to slow dramatically in the next few years and if there are temporary lulls, as there must be, these do not represent any sort of bottoming out at all. 

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Is the RMB Displacing the USD in Asia?: Michael Pettis

Date: 21 November 2012

What are the odds of the renminbi displacing the dollar, and does China want the yuan to become an international reserve currency? Besides the fact that being a major reserve currency would require the complete liberalisation of the capital account and a flexible financial system largely independent of government control, with clear and enforceable rules, it would also put China’s economy at the mercy of countries that want to turbo-charge growth by running large trade surpluses. Beijing, it appears, isn’t eager to accept any of these conditions.

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The Problem with ‘Static’ Development Models: by Michael Pettis

Date: 1 November 2012

With a shift in economic strategy comes a radical change in the relationship between underlying growth variables and their impacts on growth. Instead of making predictions and estimations extrapolated from previous forecasts – the problem with most development and growth models – a better and more meaningful understanding of China, and other emerging or international markets for that matter, can be achieved if research and analyses were conducted in a grounded and sound manner.

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Will a Weaker RMB Necessarily Aid the Chinese Economy?: Michael Pettis

Date: 22 October 2012

As part of China’s adjustment process, it is a virtual certainty that domestic growth will slow significantly for many years. However, many analysts argue that by boosting China’s export competitiveness abroad, a weaker RMB will provide some relief from the sharp expected slowdown associated with rebalancing. But such claims are invalid: China’s export competitiveness will deteriorate no matter what Beijing does to the currency. Why? 

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Is There Any Credibility Left In China’s Bull Case?: Michael Pettis

Date: 10 October 2012

In order to argue that we will not see a sharp slowdown in Chinese growth, it is not enough to claim that some expert or institution has predicted that Chinese growth will not slowdown. Neither can we hold on to the argument that China has enough savings in its coffers to bail itself out of a crisis. Nor can we assert that Beijing leaders cannot tolerate growth below 8 percent, so of course growth will not drop below 8 percent. As greater evidence for the bear camp surfaces, China bulls need stronger justifications for their positions or risk losing credibility.

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Could a Commodity Market Crash be Imminent?: Michael Pettis

Date: 19 September 2012

Commodity prices swelled in the last decade – mostly on the back of insatiable demand from China. Yet, if you exclude China, global demand for commodities like steel, for example, grew only 2 percent per year in the last twenty years, implying that China accounted for almost all the increase in global demand in the last two decades. With a China slowdown and rebalancing on the cards, could a subsequent commodity market crash be imminent?  

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