Perspectives: The China Equation
The host questions whether China can sustain export-led growth as its share of global markets rises, citing potential saturation and a protectionist response in the US. Michael Pettis questions the economic viability of China’s advances and links weak domestic demand, high saving, and rapid debt growth to imbalances that may require adjustment, potentially through a significant growth slowdown.
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China’s weak domestic demand leaves production that cannot be absorbed through consumption or investment dependent on net exports, while the host questions whether an economy of China’s size can sustain export-led growth amid potential market saturation and a protectionist reaction in the US. Michael Pettis also says it is unclear whether China’s technology and infrastructure advances are economically viable.
Michael Pettis describes competing explanations for the US-China savings imbalance: low US saving may induce higher Chinese saving, or China may structurally save more and export the surplus. He argues that a country controlling its external account is more likely to export domestic imbalances, and that as China’s imbalances adjust, much of the world’s remaining imbalances would also adjust.
Michael Pettis says raising households’ share of GDP is necessary to increase Chinese consumption, which is especially weak, but shifting income from government or businesses could be disruptive because of revenue and profit pressures. This leaves a difficult challenge in addressing demand that cannot currently absorb domestic output through consumption or investment.
GEO-POLITICS
“So China is gaining global export market share, and that, you know, speaks to its competitiveness…”—
ECONOMY
“But more importantly, while China has spectacular technology, spectacular infrastructure, all of this really great stuff, it's not very clear that any of that is economically viable.”—
“In China, everything is focused towards subsidizing production. As you know, domestic demand is incredibly weak…”—
“One theory is that the imbalances exist because the Americans save too little, and so they force the Chinese to save a lot in order to accommodate very low saving…”—
China’s K-Shaped Economy
Pettis says China’s high-tech industries are not large enough to lift the broader economy, where weak employment and demand leave most activity on the declining side of a K-shaped recovery.
China’s Export-Led Growth
Pettis links China’s export dependence to weak domestic demand and production-focused subsidies, and warns that its scale of reliance on exports is historically unusual.
China-US Saving Imbalances
Pettis rejects the idea that China’s and America’s external imbalances arise independently, arguing that China’s domestic imbalances are more likely driving its surplus and wider global adjustment.
China’s Household Income Challenge
Pettis says rebalancing requires raising household income and consumption, but redistribution is difficult and further fiscal stimulus risks compounding China’s exceptionally fast-growing debt.
China’s Costly Economic Adjustment
Pettis doubts there is a painless solution to the imbalances, pointing to historical precedents that ended in contraction or prolonged stagnation and warning of a significant growth slowdown.
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