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

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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
Is China’s High-Quality Investment Output Economically Viable?
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Commentary
What GDP Means in a Soft Budget Economy Like China
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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.

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