Could China's Efforts to Cool the Economy Be Working Too Well?

{
  "authors": [
    "Michael Pettis"
  ],
  "type": "legacyinthemedia",
  "centerAffiliationAll": "dc",
  "centers": [
    "Carnegie Endowment for International Peace"
  ],
  "collections": [],
  "englishNewsletterAll": "asia",
  "nonEnglishNewsletterAll": "",
  "primaryCenter": "Carnegie Endowment for International Peace",
  "programAffiliation": "AP",
  "programs": [
    "Asia"
  ],
  "projects": [],
  "regions": [
    "East Asia",
    "China"
  ],
  "topics": [
    "Economy"
  ]
}

In The Media

Could China's Efforts to Cool the Economy Be Working Too Well?

China’s high level of investment is causing a rapid rise in debt and will likely lead to a slowdown in the country’s economic growth.

By Michael Pettis

Published on Jun 13, 2011

Source: Marketplace

The Chinese communist government is intentionally trying to slow down the world's second-largest economy. But some are now worried that the slow down is coming too fast. Michael Pettis, economist at Peking University in Beijing, explains.

STEVE CHIOTAKIS: There's word today out of China -- big banks handed out fewer loans in May. Perhaps a sign Beijing's efforts to cool an overheated economy could be making some headway. But how cool is too cool? Michael Pettis is an economist at Peking University in Beijing. Hi Michael.

MICHAEL PETTIS: Hi how are you?

CHIOTAKIS: Doing well. Is there a risk that the Chinese government will over reach and hinder the country economically, or even cause a slowdown?

PETTIS: A slowdown is inevitable. We've been going extremely rapidly over the last 30 years because of huge increases in investment. And there's increasing evidence that five years ago, perhaps even ten years ago, a very large amount of this investment was being misallocated. It was being used to build excess real estate development or excess infrastructure. And one of the consequences is that we've been seeing a very rapid rising in debt and I don't think we can do this many more years before we run into real trouble.

CHIOTAKIS: How has China avoided the economic downturn the rest of the world's experienced?

PETTIS: Well, it hasn't really avoided it. What it did was it postponed it. They responded to the 2007-2008 crisis by taking a country which already had the highest investment growth rate in history and significantly increasing it. Now when you increase investment, you always get growth. But if the investment is not economically viable, you give back all of that growth in the future and I'm afraid that's what may have happened here.

CHIOTAKIS: Michael Pettis, economist at Peking University in Beijing. Michael thanks.

PETTIS: Thank you.

About the Author

Michael Pettis

Nonresident Senior Fellow, Carnegie China

Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, Pettis is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.

Recent Work

Commentary
The Plaza Accord and Its Relevance for China
- Michael Pettis
Commentary
Who Paid for China’s Last Debt Cleanup, and Who Will Pay for the Next?
- Michael Pettis

Economy East Asia China

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

More Work from Carnegie China

Commentary
The Spring and Autumn of Chinese Politics
China’s political future will be shaped between now and next October. As the Communist Party enters its intense “campaign season” to prepare for a major political transition in 2027, reading Beijing's actions and responses may become more difficult as domestic politics weigh on its behavior more than usual.
Damien Ma
Article
Can China Turn Its Small Modular Reactor Ambitions into Commercial Reality?
China has showcased its engineering prowess with small modular reactor demonstration projects. But turning these technological achievements into commercial success will be a greater challenge.
Tong Zhao
Commentary
China Financial Markets
The Plaza Accord and Its Relevance for China
The Plaza Accord was not an externally imposed punishment of Japan but part of a broader restructuring that Japanese economists and policymakers themselves recognized was necessary. Its effects were undermined, however, when Tokyo responded to the resulting slowdown with policies that exacerbated investment, credit expansion, and the very imbalances the adjustment was intended to resolve.
Michael Pettis
Paper
Untangling the Nuclear Knot: A Constructive Agenda for Managing China’s Nuclear Relations with the United States and Its Allies
The nuclear relationship between China and the United States is increasingly shaped by widening perception gaps rather than deliberate strategic design.
Tong Zhao
Commentary
China Financial Markets
Who Paid for China’s Last Debt Cleanup, and Who Will Pay for the Next?
China’s banking crisis in the 2000s was resolved by transferring the costs to households through financial repression—a decision that recapitalized the banks while exacerbating the structural imbalances that continue to shape the Chinese economy today.
Michael Pettis

More Work from Carnegie China

Commentary

The Spring and Autumn of Chinese Politics

China’s political future will be shaped between now and next October. As the Communist Party enters its intense “campaign season” to prepare for a major political transition in 2027, reading Beijing's actions and responses may become more difficult as domestic politics weigh on its behavior more than usual.

Damien Ma

Article

Can China Turn Its Small Modular Reactor Ambitions into Commercial Reality?

China has showcased its engineering prowess with small modular reactor demonstration projects. But turning these technological achievements into commercial success will be a greater challenge.

Tong Zhao

Commentary

China Financial Markets

The Plaza Accord and Its Relevance for China

The Plaza Accord was not an externally imposed punishment of Japan but part of a broader restructuring that Japanese economists and policymakers themselves recognized was necessary. Its effects were undermined, however, when Tokyo responded to the resulting slowdown with policies that exacerbated investment, credit expansion, and the very imbalances the adjustment was intended to resolve.

Michael Pettis

The nuclear missile formation passes through Tian'anmen Square during a military parade on September 3, 2025 in Beijing, China.

Paper

Untangling the Nuclear Knot: A Constructive Agenda for Managing China’s Nuclear Relations with the United States and Its Allies

The nuclear relationship between China and the United States is increasingly shaped by widening perception gaps rather than deliberate strategic design.

Tong Zhao

Commentary

China Financial Markets

Who Paid for China’s Last Debt Cleanup, and Who Will Pay for the Next?

China’s banking crisis in the 2000s was resolved by transferring the costs to households through financial repression—a decision that recapitalized the banks while exacerbating the structural imbalances that continue to shape the Chinese economy today.

Michael Pettis