Michael Pettis
@michaelpettis.bsky.social
Senior Fellow at Carnegie China. For speaking engagements, please write to [email protected]
Michael Pettis is an American professor of finance at Guanghua School of Management at Peking University in Beijing and a nonresident senior fellow at the Carnegie Endowment for International Peace. He was founder and co-owner of punk-rock nightclub D22 in Beijing, which closed in January 2012. .. more
Economics
76%
Political science
11%
I only partly agree. The inflows in the 1980s were simply the flip side of rising US trade deficits, which were likely to be deflationary. I agree, however, that the 1970s and 1980s were the beginning of rising fiscal deficits.
China Share of manufacturing - data, chart | TheGlobalEconomy.com
China: Value added by the manufacturing sector as percent of GDP: The latest value from 2024 is 24.87 percent, a decline from 25.5 percent in 2023. In comparison, the world average is 12.37 percent, b...
www.theglobaleconomy.com
2/2
To give some context, manufacturing is about 16-17% of global GDP, and about 25-26% of China's GDP. While China accounts for roughly 17-18% of global GDP, it accounts for 13% of global consumption and 31% of global manufacturing.
www.theglobaleconomy.com/China/Share_...
To give some context, manufacturing is about 16-17% of global GDP, and about 25-26% of China's GDP. While China accounts for roughly 17-18% of global GDP, it accounts for 13% of global consumption and 31% of global manufacturing.
www.theglobaleconomy.com/China/Share_...
Shanghai to shore up manufacturing while eyeing global financial status
City’s next five-year plan expected to contain measures designed to lift manufacturing’s share of GDP to no less than 25 per cent.
www.scmp.com
1/2
SCMP: "Shanghai is set to double down on efforts to prevent the “hollowing out” of its manufacturing sector even as it pursues global financial centre status." It plans to raise the manufacturing share of its economy from 20% to 25% in the next five years.
www.scmp.com/economy/arti...
SCMP: "Shanghai is set to double down on efforts to prevent the “hollowing out” of its manufacturing sector even as it pursues global financial centre status." It plans to raise the manufacturing share of its economy from 20% to 25% in the next five years.
www.scmp.com/economy/arti...
10/10
But this cannot be true. Any change in a country's external account must be matched by a change in its domestic account. When foreigners export excess saving to the US, the US domestic imbalance must adjust one way or another. It is easy, but wrong, to pretend it doesn't.
But this cannot be true. Any change in a country's external account must be matched by a change in its domestic account. When foreigners export excess saving to the US, the US domestic imbalance must adjust one way or another. It is easy, but wrong, to pretend it doesn't.
9/10
Simply assuming foreign inflows finance the fiscal deficit is a mistake that comes from thinking incrementally about the economy rather than systemically, or in terms of balance sheets. It implicitly assumes that domestic debt is independent of the external account.
Simply assuming foreign inflows finance the fiscal deficit is a mistake that comes from thinking incrementally about the economy rather than systemically, or in terms of balance sheets. It implicitly assumes that domestic debt is independent of the external account.
8/10
deficits (they have higher government debt-to-GDP ratios than the US) while they were exporting capital, not importing it, and countries in Europe have managed to run larger fiscal deficits than the US without the "benefits" of a global reserve currency.
deficits (they have higher government debt-to-GDP ratios than the US) while they were exporting capital, not importing it, and countries in Europe have managed to run larger fiscal deficits than the US without the "benefits" of a global reserve currency.
7/10
The idea that it is foreign inflows associated with the reserve status of the dollar that "allow" the US to run such large fiscal deficits makes especially little sense in the context of foreign countries. Japan and China, for example, have run up far greater fiscal...
The idea that it is foreign inflows associated with the reserve status of the dollar that "allow" the US to run such large fiscal deficits makes especially little sense in the context of foreign countries. Japan and China, for example, have run up far greater fiscal...
www.nber.org
6/10
weak demand, not scarce capital – the higher saving of the rich, like foreign export of excess saving into the US, is likely to lead to more household or fiscal debt. This is what Atif Mian, Ludwig Straub, Amir Sufi found in an important recent paper.
www.nber.org/system/files...
weak demand, not scarce capital – the higher saving of the rich, like foreign export of excess saving into the US, is likely to lead to more household or fiscal debt. This is what Atif Mian, Ludwig Straub, Amir Sufi found in an important recent paper.
www.nber.org/system/files...
5/10
In fact net inflows have the same impact on US debt as rising income inequality. When income is more concentrated, the saving of the rich rises (the rich save more of their income that the poor), but because this doesn't lead to more investment – which is constrained by...
In fact net inflows have the same impact on US debt as rising income inequality. When income is more concentrated, the saving of the rich rises (the rich save more of their income that the poor), but because this doesn't lead to more investment – which is constrained by...
Foreign Capital Inflows Don’t Lower U.S. Interest Rates
Contrary to conventional thinking, net foreign capital inflows do not lower American interest rates (unless they do so by raising U.S. unemployment). A tax on foreign inflows is therefore unlikely to ...
carnegieendowment.org
4/10
As I explain elsewhere, it isn't a rise in investment (the default assumption of most economists), and because a rise in unemployment is likely to set off monetary easing or fiscal expansion, the inflows are most likely to increase domestic US debt.
carnegieendowment.org/china-financ...
As I explain elsewhere, it isn't a rise in investment (the default assumption of most economists), and because a rise in unemployment is likely to set off monetary easing or fiscal expansion, the inflows are most likely to increase domestic US debt.
carnegieendowment.org/china-financ...
3/10
For those who understand accounting identities, these are the three main ways foreign inflows can result in wider gap between investment and saving. When there is an increase in net foreign inflows, in other words, one (or some combination) of these must occur.
For those who understand accounting identities, these are the three main ways foreign inflows can result in wider gap between investment and saving. When there is an increase in net foreign inflows, in other words, one (or some combination) of these must occur.
2/10
While this is widely believed, it isn't true. Foreign capital inflows don't fund fiscal deficits. They fund current account deficits, and they must be matched domestically either by higher US investment, higher US unemployment, or higher US household and fiscal debt.
While this is widely believed, it isn't true. Foreign capital inflows don't fund fiscal deficits. They fund current account deficits, and they must be matched domestically either by higher US investment, higher US unemployment, or higher US household and fiscal debt.
Is America Heading for a Debt Crisis? Look Abroad for Answers
Politics and debt don’t mix well. Americans would be wise to look across the Atlantic to see how tough things can get.
www.wsj.com
1/10
WSJ: "What saves American finance is the dollar’s status as the must-have global asset and trading currency. Both roles face challenges, though, and the more the U.S. exploits foreigners, the higher the risk they look elsewhere."
www.wsj.com/finance/inve...
WSJ: "What saves American finance is the dollar’s status as the must-have global asset and trading currency. Both roles face challenges, though, and the more the U.S. exploits foreigners, the higher the risk they look elsewhere."
www.wsj.com/finance/inve...
It would boost income and overall consumption by more than it boosts imports.
12/12
While rapid currency appreciation would certainly benefit the Chinese economy in the longer term, it is likely to be very disruptive in the short term.
Unfortunately, the longer China waits, the more dependent the economy becomes on manufacturing, and so the more disruptive the adjustment.
While rapid currency appreciation would certainly benefit the Chinese economy in the longer term, it is likely to be very disruptive in the short term.
Unfortunately, the longer China waits, the more dependent the economy becomes on manufacturing, and so the more disruptive the adjustment.
11/12
This is a good thing in the longer term and especially good for employment prospects (services tend to be more labor-intensive than manufacturing), but in the short term, as Chinese businesses begin to shift production, it could lead to layoffs and rising unemployment.
This is a good thing in the longer term and especially good for employment prospects (services tend to be more labor-intensive than manufacturing), but in the short term, as Chinese businesses begin to shift production, it could lead to layoffs and rising unemployment.
10/12
to buy clothing, electronic goods, and processed food but, more importantly, as Chinese incomes rise, a rising share of their consumption will be directed towards services rather than manufactured goods.
to buy clothing, electronic goods, and processed food but, more importantly, as Chinese incomes rise, a rising share of their consumption will be directed towards services rather than manufactured goods.
9/12
Yes, over the longer term, but over the short term its not so easy. The rise in Chinese consumption wouldn't smoothly replace the decline in Chinese manufacturing exports.
Not only are Chinese households far less likely to buy steel, chemicals and ships and more likely...
Yes, over the longer term, but over the short term its not so easy. The rise in Chinese consumption wouldn't smoothly replace the decline in Chinese manufacturing exports.
Not only are Chinese households far less likely to buy steel, chemicals and ships and more likely...
8/12
But would that matter? As households retained a larger share of GDP, wouldn't China's decreasing exports be matched by an increase in domestic consumption? That, after all, is supposed to be one of the main benefits rebalancing.
But would that matter? As households retained a larger share of GDP, wouldn't China's decreasing exports be matched by an increase in domestic consumption? That, after all, is supposed to be one of the main benefits rebalancing.
7/12
Could Chinese manufactures afford such an increase in domestic costs and still be able to export?
Almost certainly not. China's export success depends on subsidies like its very cheap currency. Reversing them will undermine its competitive export sector.
Could Chinese manufactures afford such an increase in domestic costs and still be able to export?
Almost certainly not. China's export success depends on subsidies like its very cheap currency. Reversing them will undermine its competitive export sector.
6/12
So what would happen if the PBoC raised the value of the RMB by 50% over the next five years, as Shan proposes, or even by 30%?
For one, the cost of domestic production (in foreign currency terms) would rise by 43-100%.
So what would happen if the PBoC raised the value of the RMB by 50% over the next five years, as Shan proposes, or even by 30%?
For one, the cost of domestic production (in foreign currency terms) would rise by 43-100%.
5/12
indirect subsides in the world, benefit from an enormously efficient and expensive infrastructure, and get huge research support, and yet they are not especially profitable – even running big losses in some of the most important industries.
indirect subsides in the world, benefit from an enormously efficient and expensive infrastructure, and get huge research support, and yet they are not especially profitable – even running big losses in some of the most important industries.
4/12
But rebalancing through currency appreciation also shows how difficult it is to shift the structure of the economy. Chinese manufacturers are globally the most competitive in the world, but they are not especially efficient. They receive the highest direct and...
But rebalancing through currency appreciation also shows how difficult it is to shift the structure of the economy. Chinese manufacturers are globally the most competitive in the world, but they are not especially efficient. They receive the highest direct and...
3/12
In fact any policy that correctly rebalances the distribution of income towards more domestic consumption works the same way, raising the household share of GDP – by increasing wages relative to productivity, raising interest rates, expanding social welfare spending, etc.
In fact any policy that correctly rebalances the distribution of income towards more domestic consumption works the same way, raising the household share of GDP – by increasing wages relative to productivity, raising interest rates, expanding social welfare spending, etc.
2/12
and manufacturers are net exporters, an appreciating currency is effectively an income transfer from manufacturers to households.
This, as former PBoC governor Zhou Xiaochuan explained many years ago, would be a very effective part of the income rebalancing process.
and manufacturers are net exporters, an appreciating currency is effectively an income transfer from manufacturers to households.
This, as former PBoC governor Zhou Xiaochuan explained many years ago, would be a very effective part of the income rebalancing process.
Why China needs to let the renminbi rise
A steady appreciation would boost domestic consumption and improve trade relations
www.ft.com
1/12
Weijian Shan is right: China does need to let the renminbi rise, and substantially. An appreciating currency would "subsidize" imports and "tax" exports – the opposite of what tariffs are supposed to do. Given that households are net importers...
www.ft.com/content/5bb8...
Weijian Shan is right: China does need to let the renminbi rise, and substantially. An appreciating currency would "subsidize" imports and "tax" exports – the opposite of what tariffs are supposed to do. Given that households are net importers...
www.ft.com/content/5bb8...