Monetary Matters with Jack Farley China’s Involution Trap | Michael Pettis on China's Excess Savings, Industrial Overcapacity, and Exporting of Deflation
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Nov 30, 2025 
Michael Pettis, a Senior Fellow at the Carnegie Endowment for International Peace, discusses China's economic dynamics and the concept of 'economic involution.' He explores how China's suppressed consumption fuels global imbalances and the risks associated with shifting from real estate to manufacturing bubbles. Pettis argues that current tariffs fail to address systemic issues, merely redirecting trade flows. He proposes that China must significantly boost household consumption to avoid economic stagnation, emphasizing the need for radical solutions to tackle growing debt and deflation.
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Investment Shifts Created Manufacturing Involution
- China shifted investment from infrastructure to property to manufacturing to avoid GDP slowdown, creating repeated bubbles.
- That created 'involution' where excess manufacturing capacity produced below-cost output and exported deflation.
Systemic Imbalances Beat Bilateral Metrics
- Bilateral trade shifts hide systemic imbalances; the U.S. deficit still accommodates China's growing global surplus.
- If the U.S. reduces its deficit, global surpluses must shrink or Europe must replace the U.S. as absorber.
Use Capital-Flow Tools, Not Bilateral Tariffs
- Prefer systemic tools like capital-flow taxes or customs-union rules over patchwork bilateral tariffs.
- Consider taxing foreign capital inflows (market-access charge) to discourage imbalanced surplus financing.
