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
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Political science
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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...
8/8
Just for China to be a more "normal" low-consuming country by 2035 requires that consumption growth account for roughly 85% of GDP growth every year during the next ten years. We're nowhere near that number.
Just for China to be a more "normal" low-consuming country by 2035 requires that consumption growth account for roughly 85% of GDP growth every year during the next ten years. We're nowhere near that number.
7/8
What is more, the fact that total consumption accounts for roughly 56% of total China's GDP means that the 53.5% consumption share of growth in 2025 is actually consistent with a decline in the overall share. It is still going in the wrong direction, in other words.
What is more, the fact that total consumption accounts for roughly 56% of total China's GDP means that the 53.5% consumption share of growth in 2025 is actually consistent with a decline in the overall share. It is still going in the wrong direction, in other words.
6/8
This is a little dishonest. Consumption's 53.5% contribution to GDP growth in 2025 year to date is certainly better than its 2024 contribution of 44.5%, but both are bad numbers, and well below the already-low 60% it typically contributed to GDP growth before COVID.
This is a little dishonest. Consumption's 53.5% contribution to GDP growth in 2025 year to date is certainly better than its 2024 contribution of 44.5%, but both are bad numbers, and well below the already-low 60% it typically contributed to GDP growth before COVID.
5/8
Xinhua goes on to say: "Consumption remains a robust driver of the Chinese economy. In the first three quarters of this year, final consumption expenditure contributed 53.5 percent to China's economic growth, compared to 44.5 percent for the entirety of 2024."
Xinhua goes on to say: "Consumption remains a robust driver of the Chinese economy. In the first three quarters of this year, final consumption expenditure contributed 53.5 percent to China's economic growth, compared to 44.5 percent for the entirety of 2024."
4/8
This may have been the problem in the USSR in the 1960s and 1970s, when one of the the main ways to repress consumption growth was through the scarcity of consumer goods, but it isn't the problem here. In China, the problem is scarcity of demand, not of supply.
This may have been the problem in the USSR in the 1960s and 1970s, when one of the the main ways to repress consumption growth was through the scarcity of consumer goods, but it isn't the problem here. In China, the problem is scarcity of demand, not of supply.
3/8
the supply and demand of consumer goods" seems mainly to focus on producing more and better consumer goods, as if the problem in China is that households have plenty of money to spend, and are eager to spend it, but just don't have anything to spend it on.
the supply and demand of consumer goods" seems mainly to focus on producing more and better consumer goods, as if the problem in China is that households have plenty of money to spend, and are eager to spend it, but just don't have anything to spend it on.
2/8
But while everyone in government now acknowledges the urgent need to raise the consumption share of GDP, and wants to be seen doing something to achieve the goal, it isn't clear that they know what to do. This new "comprehensive" plan "to improve the alignment of...
But while everyone in government now acknowledges the urgent need to raise the consumption share of GDP, and wants to be seen doing something to achieve the goal, it isn't clear that they know what to do. This new "comprehensive" plan "to improve the alignment of...
Economic Watch: China eyes improved supply-demand alignment to unlock consumption potential
english.news.cn
1/8
Xinhua: "China aims to "achieve a notable increase in household consumption as a share of GDP," and to increase the role of domestic demand as the principal engine of economic growth over the next five years, according to the new MIIT plan".
english.news.cn/20251127/553...
Xinhua: "China aims to "achieve a notable increase in household consumption as a share of GDP," and to increase the role of domestic demand as the principal engine of economic growth over the next five years, according to the new MIIT plan".
english.news.cn/20251127/553...
Global Public Goods and the Miran Doctrine
Global Public Goods and the Miran Doctrine In his Hudson Institute speech this spring, Stephen Miran, then chair of the President’s Council of Economic Advisers and now a Federal Reserve Governor …
medium.com
Very interesting piece by Michael McNair.
medium.com/@mcnai002/gl...
medium.com/@mcnai002/gl...
Ha-Joon Chang on the Future of India's Industrialisation
Facing US tariffs and automation risks, Ha-Joon Chang argues that India must rebuild manufacturing via industrial policy, capital controls, and national champions.
frontline.thehindu.com
Good interview of Ha-Joon Chang on the Indian economy and on developments economics more generally.
frontline.thehindu.com/interviews/i...
frontline.thehindu.com/interviews/i...