China Is Exporting Unemployment | Michael Pettis on Global Trade Imbalances, American Capital Controls, and the End of The Chinese Growth Miracle
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Jack: Forward guidance is brought to you by Van Eck, a global leader in asset management since 1955. You'll be hearing more about a Van Eck ETF later on. But for now, let's get into today's interview. I'm very pleased to welcome back to forward guidance, Michael Pettis, professor of finance at the Guang School of Management at Peking University and senior associate at the Carnegie Endowment for International Peace. When Michael and I spoke a year ago, Michael expressed his concerns about the Chinese economy and in particular, its investment driven growth model.
Since then, the Chinese economy has continued to struggle. We have real estate sales, commercial real estate sales down 25%, and the Chinese economy in the Q2 grew, 4 point 7%, which sounds high, but for China, it it's really not that high. It's quite a a low level of growth. So I'm very pleased to speak to the professor once again. Professor, welcome back to forward guidance.
Can you just start us off? What have we missed over the past year since we spoke last in the in the Chinese economy, and how has it accorded with your views on the Chinese investment driven growth model and the weaknesses there, which I I'd love for you to elaborate on. Thank you.
Michael: You know, as we discussed, Jack, the problem with the investment driven growth model, there's nothing fundamentally wrong with it. But it makes a big difference whether your economy is seriously underinvested, which China was in the eighties nineties, or whether it's no longer underinvested, in which case very high investment rates are increasingly likely, to result in nonproductive investment, in which case you should see debt starting to grow much faster than GDP. And as we discussed last time, that's been happening for quite a long time. You could argue that that's been happening s
So in 2021, that was a very important year because after years of this rising real estate prices, frankly, a bubble, one in which Beijing had tried many times to rein in. But as the cost of reining it in became clear, they always backed away. But finally in, 2021, they didn't back away, and they put a serious constraint on continued growth in the real estate sector. You know, that happened very late, but it was necessary. It was good that they did it and postpone it, any longer.
But there is a big problem because the real estate sector accounted for roughly one third of the total investment in the Chinese economy. And remember, what what characterizes the Chinese economy is that it's disproportionately driven by investment. So, you know, globally, investment is about 25% of GDP, and and consumption is about 75%. It varies a bit, but it's been pretty steady at that rate during the century. Not all countries have the same levels of investment.
Low investing countries, which tend to be advanced economies or slowly growing developing economies, tend to invest 18, 19, 20 percent of GDP. And high investment economies, which tend to be very rapidly growing developing countries, tend to invest around 32, 30 3% of GDP. Well, in China, investment is 43% of GDP, and it used to be as high as 47% of GDP. It was really unprecedented number. So what that meant is that investment far more than consumption was driving growth, which is what we discussed last time.
And so, as investment became increasingly nonproductive, including in the property sector, You had to reign it in. But there was always a big problem. When investment is such an important driver of growth and you reign in investment, then one of 2 things must happen. Either consumption growth must pick u
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