The Global Rebalancing

IMGXYZ4352IMGZYXThe United States’ slow economy recovery, coupled with the lingering sovereign debt crisis in Europe, has contributed to the slowing down of China’s heavy export-based economy. The uncertain global economy and poor performance of economic giants such as Japan has led to doubts over China’s ability to maintain an eight percent growth model.

Carnegie-Tsinghua and the American Chamber of Commerce in Beijing jointly hosted the release of Carnegie-Tsinghua’s Michael Pettis’ new book The Great Rebalancing. Pettis explained the premise of his book and explored the possibility that the global economy was undergoing a period of critical rebalancing.

China’s Unstable Economic Growth Model

Pettis stated that the Chinese economic model is unstable and needs to be rebalanced.

• The Reality of China’s Debt Crisis: Pettis predicted that China could be facing its own financial crisis in four to five years, as debt levels climb higher and at a faster rate. In response to a question about how China could avert a potential crisis, Pettis recommended more privatization and the transfer of wealth from the state to household sector. Pettis further explained that Chinese wealth has increased but the household share was not growing at the same rate.
   
• Savings Imbalances: Pettis stated that the root of the problem was China’s savings imbalance. He explained that while China had the highest savings rate globally, savings was simply production minus consumption. Therefore, Pettis added, a high savings rate meant a low consumption rate. This has negative implications for economic growth. The main issue, he further explained, was how financial institutions were blocking consumption.
   
• Problem of Overinvestment: Pettis stated that China has also over-invested. He explained that Chinese banks conceal debt by rolling over losses. Investment, he added, was often recorded as consumption. The larger problem, he explained, was that investors believed that their investments were guaranteed as China has yet to deal with failed investments.

Factors Affecting China’s Future Financial Stability

• Is China’s Growth Sustainable?: When one audience member raised concern over China’s eight-percent projected growth model, Pettis responded that China’s GDP was overstated. China’s growth, he explained, was capital-intensive and the Chinese labor market was contracting. There will be an increasing wage pressure. While high wages are not a bad thing, Pettis explained that a structured economy is needed to keep pushing wages up.
   
• Inflation: While printing more money is one way to deal with these problems, Pettis warned that this might inflate the debt away, but it would actually tax the net savers and secretly subsidize the net borrowers. China needs to prioritize deflation in order to transfer money the other way around, from net borrowers to savers.
   
• China’s Next Steps: Pettis stated that the new Chinese leadership could take the necessary steps to avert financial crisis if Xi Jinping and Li Keqiang consolidated power quickly enough to push the necessary reforms through. These reforms would be the deceleration of growth rates. With enough political support, Pettis explained, Xi and Li could overcome the resistance in the investment sector. Doing so, Pettis concluded, would demonstrate that Beijing was series and committed to resolving these problems.