Odd Lots How Financial Repression in China Helped Cause the Trade War
Sep 30, 2019
Michael Pettis, a finance professor at Peking University and a leading expert on the Chinese economy, dives deep into the roots of China's trade policies. He explains how financial repression has fueled years of blistering growth but is now creating economic imbalances. Pettis discusses the need for a shift from investment to consumption and tackles China’s high savings rates due to weak social safety nets. He also explores the complexities of the U.S.-China trade relationship and the pressing necessity for economic reforms to sustain growth.
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China's Savings Rate
- China's high savings rate stems from a low household share of GDP, not cultural thriftiness.
- This investment-heavy model, effective initially, now faces limitations as productive investment opportunities dwindle.
Limits of Investment-Led Growth
- China's investment-driven model falters when new investments yield less value than their cost, increasing debt burden.
- This unsustainable cycle requires ever-faster debt growth, risking a crisis or long, slow adjustment like Japan's.
Rebalancing Challenges
- China's attempts at rebalancing have relied on increasing household debt rather than income share.
- True rebalancing requires politically challenging wealth transfers from local governments and elites to households.