In Restructuring the Chinese Economy, Michael Pettis outlines six paths that China can follow—the only logical paths that lead ultimately to. Avoiding the Fall: China’s Economic Restructuring. MICHAEL PETTIS. Copyright Date: Published by: Carnegie Endowment for International Peace. Avoiding the Fall has 98 ratings and 6 reviews. The days of rapid economic growth in China are over. Mounting debt and rising internal distortions mean t.
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Its accumulating debt will eventually force it to rebalance, if it does not do so on its own.
Much of what Beijing has achieved in the recent past has been made possible precisely because it had substantial debt. China was able to raise debt quickly and spawn investment that permitted it to circumvent the complications of its development model. Politics in China hindered the types of changes required to allow the country to keep growing in a positive manner.
Avoiding the Fall: China’s Economic Restructuring by Michael Pettis
Some of these issues include large alterations in interest rates, wages, currency, and legal structure, with, of course, political gain of the reimbursements of growth. Investment is important to the extent that the capital invested engineers growth, but it is not reasonable to assume that every single dollar that China spends on infrastructure or some arbitrary project will do so.
Additionally, the cost of investment in one sector of the Chinese economy may bounce back to a completely unrelated sector. In this sense, the burden of cost can be disproportionately spread across different facets of the economy. It may be true that labor is cheap in China, but capital is cheaper, and can even be free or have a negative cost as a result of a negative interest rate.
In the future, the availability of capital, or lack thereof, may force China to reconsider what it believes to be its most valuable economic asset. Though China may benefit by making profits, in the end it will still be a producer economy; it will not be an inventor economy. The Asian Tigers, Western Europe, and North America may all be experiencing slower economic growth than China in the present, but they also have more sustainable growth models, especially because they invent, patent, and sell their own products.
This leads into another key point: Will China start selling to its avoieing people? If it does that, then it will need to return money to the household sector, which will decrease capital available for investment.
Avoiding the Fall: China’s Economic Restructuring
This closed-loop system may end up being extremely harmful to China in just a few years. In light of these issues, Pettis brilliantly lays out the routes China can take while bearing in mind their limitations. If China is to rebalance, it must experience a surge in household wealth, whether that is at the expense of its GDP growth or high investment rates. Some important routes include increasing interest rates to force up foreign exchange values of the currency, transferring wealth from the state to the private sector by absorbing private-sector debt, or privatizing assets to increase household sector wealth.
A few years ago, it would have been hard to believe that China could see economic stagnation, but now it is obvious.