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Michael Pettis

@michaelpettis.bsky.social

12K followers 98 following 4.7K posts

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%

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Michael Pettis @michaelpettis.bsky.social · 6h

5/5
In a world in which everyone is struggling to access greater demand, debt forgiveness is a way of creating additional demand from countries that need help the most, and this demand benefits workers, farmers and businesses in the debt-forgiving country.

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Michael Pettis @michaelpettis.bsky.social · 6h

4/5
external debt repayment) or imports.

The less these very poor countries have to recycle their export earnings in the form of debt repayments, in other words, the more they will pay for imports, and ultimately the imports come directly or indirectly from the country that granted the debt relief.

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Michael Pettis @michaelpettis.bsky.social · 6h

3/5
There's actually a very important fourth dividend that too many analysts forget. All external inflows into a country (for very poor countries these typically come mostly from exports) must be recycled externally, in the form either of capital outflows (in this case, mainly...

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Michael Pettis @michaelpettis.bsky.social · 6h

2/5
their balance sheets without complex restructurings; investors receive market returns while delivering social impact; and crisis-affected communities gain access to sustained, predictable funding for life-saving services."

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Michael Pettis @michaelpettis.bsky.social · 6h

1/5
David Miliband argues that a program that reduces the external debt of very poor countries "is financial engineering that provides a triple dividend: governments can get breathing room on...
www.ft.com/content/f48d...

We can restructure debt for humanitarian ends

Poor and middle-income countries are spending money on interest payments that could go towards essential public goods

www.ft.com

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Michael Pettis @michaelpettis.bsky.social · 7h

9/9
My understanding is that at least some top officials in Washington believe the US is indeed in a stronger position, although ultimately what matters is if Trump believes it. I guess we will soon see how much the stock market drives Trump's policy decisions.

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Michael Pettis @michaelpettis.bsky.social · 7h

8/9
All this suggests that the key to how the latest events are resolved depends on whether Washington believes that it is in a stronger position to weather a 2-3 year trade conflict than Beijing thinks it is, especially if it is successful in reducing its trade deficit.

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Michael Pettis @michaelpettis.bsky.social · 7h

7/9
That is why I suspect that an escalation of global trade conflict is likely to be more difficult for China in the medium term, even if its ability to control the financial system and ignore short-term pain puts it in a stronger position in the short-term.

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Michael Pettis @michaelpettis.bsky.social · 7h

6/9
With investment levels already so high, the only way China can get debt under control is to reduce investment growth, but if it wants to maintain current growth rates, it cannot do this without generating a surge in consumption growth, something it has found very difficult to pull off.

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Michael Pettis @michaelpettis.bsky.social · 7h

5/9
One very obvious example, of course, is the very different impacts the global trade contraction during the 1930s had on the US, the world's leading trade surplus nation at the time, and the UK, one of the world's leading trade deficit nations.

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Michael Pettis @michaelpettis.bsky.social · 7h

4/9
So which is better, to have excess supply or to have excess demand? The historical precedents are pretty clear: in a global trade conflict, the persistent surplus countries have always been more vulnerable to a contraction in trade than the persistent deficit countries.

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Michael Pettis @michaelpettis.bsky.social · 7h

3/9
But if you were to rewrite the sentence as: "With hiring slowing, domestic demand stagnant and prices declining, many economists say China isn’t positioned to absorb another major trade fight with US", it would no less true.

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Michael Pettis @michaelpettis.bsky.social · 7h

2/9
If true, this could be a very high-risk strategy. According to the WSJ, "With hiring slowing, manufacturing contracting and prices rising, many economists say the U.S. isn’t positioned to absorb another major trade fight with China."

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Michael Pettis @michaelpettis.bsky.social · 7h

1/9
WSJ: "According to the people close to Beijing’s decision-making process, Xi’s hard-line strategy is based on the belief that Trump will ultimately fold and offer concessions rather than deploy Washington’s own significant leverage."
www.wsj.com/world/china/...

China, Betting It Can Win a Trade War, Is Playing Hardball With Trump

Chinese leader Xi Jinping thinks the president will fold before launching new tariffs that would roil markets.

www.wsj.com

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Reposted by Michael Pettis

Michael Pettis @michaelpettis.bsky.social · 11h

Yicai: "In the 9 months ended Aug. 31, trade rose 4% to CNY33.6 trillion. Exports rose 7.1% to CNY19.95 trillion, while imports dipped 0.2% to CNY13.66 trillion. Measured in US dollars, exports were up 6.1% at $2.8 trillion and imports down 1.1% at $1.9 trillion."
www.yicaiglobal.com/news/chinas-...

China’s Third-Quarter Trade Climbs 6%, Extending Growth Streak to Eighth Straight Quarter

www.yicaiglobal.com

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Michael Pettis @michaelpettis.bsky.social · 11h

7/7
To the extent that it is in other manufacturing sectors, this will mostly shift price-cutting from the involuted manufacturing sectors to the non-involuted sectors, in which case we are likely to see deflationary pressures revive, perhaps next year.
bsky.app/profile/mich...

Michael Pettis @michaelpettis.bsky.social · 2d

1/4
Yicai: "China has released new growth stabilization measures for 10 major industries: steel, nonferrous metals, petrochemical, chemicals, building material, machinery, automobile, electrical equipment, light industry, and electronic information."
www.yicaiglobal.com/news/china-i...

China Unveils New Measures to Steady Growth Across 10 Key Industries

www.yicaiglobal.com

Michael Pettis @michaelpettis.bsky.social · 11h

6/7
By now cutting back on investment in the involuted industries, Beijing must decide where else to increase investment in order to achieve the GDP growth target. To the extent that it is in infrastructure. this should boost domestic demand and keep deflation at bay for a few years.

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Michael Pettis @michaelpettis.bsky.social · 11h

5/7
was to meet the GDP target, Beijing engineered a sharp expansion in manufacturing capacity in a world already suffering from excess. This led to explosive growth in capacity in the preferred industries into which much of the additional investment flowed.
carnegieendowment.org/posts/2025/0...

What’s New about Involution?

“Involution” is a new word for an old problem, and without a very different set of policies to rein it in, it is a problem that is likely to persist.

carnegieendowment.org

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Michael Pettis @michaelpettis.bsky.social · 11h

4/7
So is deflation behind us? It depends on how China balances the fight against involution. Remember that involution was a consequence of Beijing's response to the sharp drop in property investment after 2021-22. Because it couldn't let overall investment growth decline if it...

Michael Pettis @michaelpettis.bsky.social · 11h

3/7
It is worth noting that on a year-on-year basis, consumer goods were down 0.8% in September consumer services were up 0.6% and core inflation was up 1.0%. Much of the deflation in other words, was concentrated in tradable goods, which shouldn't be much of a surprise.

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Michael Pettis @michaelpettis.bsky.social · 11h

2/7
PPI was also flat month on month for the second month in a row. Prices were still down year on year, with CPI at -0.3% and PPI at -2.3%, but with the fight against involution, some of the worst price cutting seems to be behind us.

Michael Pettis @michaelpettis.bsky.social · 11h

1/7
In a sign perhaps that the fight against involution has been successful, CPI prices in China were stable for the third month in a row, up 0.1% month on month in September. This is still well below the 2% target, but it is better than more deflation.
english.news.cn/20251015/d61...

China's core inflation hits 19-month high, signaling firmer domestic demand

english.news.cn

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Michael Pettis @michaelpettis.bsky.social · 1d

8/8
For me these are the two key questions for China: first, when will the US succeed in cutting its trade deficits, and second, will the EU be able to prevent itself from replacing US deficits? China must rebalance before these two things happen.

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Michael Pettis @michaelpettis.bsky.social · 1d

7/8
The other way is for some other country (and this basically means the EU) to provide the deficits that replace US deficits, and this is something that the EU wants to avoid at all costs. Whether or not they are able to do so is still up for debate.

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Michael Pettis @michaelpettis.bsky.social · 1d

6/8
But that is the wrong way to think about it. If the US succeeds in cutting its deficit, there are only two ways the world can respond. One is for surplus countries to cut their surpluses, which will be extremely painful if they cannot count on domestic demand.

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Michael Pettis @michaelpettis.bsky.social · 1d

5/8
Because many analysts seem to think that what matters in the trade dispute is the bilateral Chinese surplus with the US, rather than the overall US trade deficit, they speak of China's growing surpluses with the rest of the world as an indication of export "resilience".

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Michael Pettis @michaelpettis.bsky.social · 1d

4/8
To the extent that Washington understands this, my guess is that it can afford to be accommodative on bilateral discussions, but will increasingly focus on cutting the overall trade deficit. This will inevitably mean a change in the current trade policies.

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Michael Pettis @michaelpettis.bsky.social · 1d

3/8
Although it is the growing US trade deficit that accommodates the growing Chinese surplus, I suspect many in Beijing think that it is the bilateral surplus with the US that matters, which is why it believed it needed to "win" the trade discussions as quickly as possible.

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