China’s investment-driven economic growth model, as explained by Professor Michael Pettis of Peking University, has been successful in generating high levels of investment. However, this approach has led to underperformance in consumption, low household income, and an explosion in the Chinese trade surplus. While the country’s high investment levels of 42-44% of GDP have been maintained for over 20 years, Pettis warns that this is unsustainable in the long run.
To reduce China’s trade surplus, Pettis suggests that significant changes in the political, business, and financial sectors are necessary. These changes may include redistributing income to ordinary people and accepting slower GDP growth. As investment levels come down, GDP growth will either slow down or consumption growth will need to pick up speed. However, it is unlikely that consumption will grow at a rate that could balance the reduction in investment, and therefore, the outcome may be worse than expected.
Pettis also highlights the risks of China’s real estate sector, which is more important as an asset market than the stock market. The Chinese stock market is speculative, and there is almost no correlation between its performance and that of the economy or corporate profits. Pettis explains that the Chinese central bank can increase domestic liquidity but has limited impact on the rest of the world through financial means.
One significant issue Pettis raises is China’s balance of payments. Maintaining high trade surpluses could mean that China takes growth away from the rest of the world, while a contraction of their trade surplus would add demand to the rest of the world. Although a Chinese boom could be good for commodity producers, it may not necessarily cause a boom in the demand for U.S goods. Pettis believes that China’s growth will likely be around two or three percent in the long-term.
The future of China’s economic growth model raises concerns for the West and its diaspora. As China continues to lend to developing countries, albeit at a decreased rate since the 2015 economic shock caused by Venezuela, the free flow of capital affects economies globally. The difference between China’s regulated banking system and the US banking system can lead to unforeseen consequences for both sides.
In conclusion, China’s investment-driven growth model has reached an unsustainable point, and significant changes are necessary to balance the economic landscape. The country’s high trade surplus poses a challenge not only for China but also for the rest of the world, as it impacts global growth rates and demand. Furthermore, the risks associated with China’s real estate sector and its lending to developing countries may have long-term implications on the global economy. While a precise prediction of China’s future growth rate is impossible, it is crucial for both China and the West to prepare for a more challenging adjustment phase that may lie ahead.
