China Won’t Save the World Economy, Nor Will the US, Expect Long Adjustments

Michael Pettis at China Financial Markets discusses an article on Boosting Consumption by LI Xunlei at the Shanghai Finance Institute.

Please consider this Tweet Thread by Michael Pettis.

• Li Xunle, of Zhongtai Securities, argues that for China to continue growing, consumption must become the main driver of growth. This seems to have become consensus among Chinese economists in the past few years, and especially in the past year.
• What’s perhaps more important is the recognition that the growth driven by investment is unsustainable: “The problem of over-investment in infrastructure has emerged. It is increasingly difficult to find good investment projects.”
• “Therefore,” he continues, “we’re finding it harder to rely on the investment-driven model for economic growth and should instead look to consumption to drive growth.”
• This has been true for many years, however, and it has taken way too long for the consensus to emerge, which is why during this time debt has become a huge problem for the economy. Unfortunately, I don’t think this will change any time soon.
• One reason is that Li, like most Chinese economists, continues to see non-productive investment as an important countercyclical measure, which is another way of saying that they are willing to sacrifice long-term growth for short-term stability.
• The other reason is that they haven’t yet come to a consensus on the deep institutional changes that are a necessary part of any meaningful rebalancing of the economy away from investment and towards consumption.
• It is not enough just to say that we need to redistribute income in way that boosts the consumption share of GDP. After three decades in which business, financial, political and legal institutions have been…
• structured around the systematic transfer of income from households to subsidize investment and manufacturing, a reversal of these transfers cannot help but have highly disruptive impacts.
• The prioritizing of shorter-term stability over longer-term growth and the reluctance to embrace the necessary institutional reforms (these are probably different ways of saying the same thing) is why I expect China’s adjustment to be a very long, Japan-style adjustment.

Let’s emphasize that last point because it is the key one. 

Expect a Very Long Japan-Style Adjustment

“The prioritizing of shorter-term stability over longer-term growth and the reluctance to embrace the necessary institutional reforms (these are probably different ways of saying the same thing) is why I expect China’s adjustment to be a very long, Japan-style adjustment.”

EU Comparison

Pettis’ statement certainly applies to the EU and to a lesser extent the US. How long has the EU avoided badly-needed structural reforms? 

• Germany is stuck on an export mercantilism model, just like China.
• Greece and Italy have done nothing to enhance productivity despite known problems for decades.
• Italy’s tax system and banking system have also needed reform for decades.
• In France, workers fight pension reform and want more time off. 
• The EU wants to break up successful corporations like Microsoft and Google instead of letting them thrive. 
• France still protects the small French farmer’s way of life. Every year, France vetoes agricultural reform at global trade talks.
• The EU’s Carbon Border Adjustment Mechanism is a total disaster
• Germany’s decision to kill nuclear power to appease the Greens was a total disaster
• The Eurozone is still bickering over Eurobonds debt mutualization. It will do so until there is a major banking failure in Italy or Germany. 

Rank those ideas however you want. It’s a disaster guaranteed to start a currency crisis at some point.

What About the US?

• In the US, Progressives have gone mad. They demand more government and bigger government. 
• Biden is hell bent on becoming more like the EU. 
• Protectionists and government expansionists are running the show. 
• Tariffs and sanctions raise costs everywhere.
• Biden’s push for more unions, higher wages, living wages, are inflationary.
• De-globalization and decarbonization ideas are also very inflationary. 
• Biden unwisely weaponized the US dollar for the first time in history. 
• The Fed will not be able to slash rates like before to spur growth out of fear of inflation. 

Globally Speaking

When does any country emphasize long-term growth over the short-term?

Short-term expediency has always been the case, but global wage arbitrage and increasing productivity, and rising standards of living masked over the problem. 

We now have aging demographics in China, Japan, the EU, and US. There is a huge need for more medical care services. 

The only solution from the Democrats is higher taxers and more free services: Free child care, living wages, Medicare for all, free college, etc.

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3. Sanctions and Tariffs: Sanction Debate – Are US Sanctions on Russia and China Working or Backfiring?
4. Bust Up Google: Competition is Alive, Microsoft and Google Wage a Search Engine Battle Over AI but the EU and Biden administration want to break them up
5. Coal Use in Germany: A Big Green Mess in Germany With Coal a Stunning 31 Percent of Electricity
6. CBAM Carbon Taxes: EU Imposes the World’s Largest Carbon Tax Scheme, Inflationary Madness Sets In
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9. Green Trade War: A New Green Deal Trade War Accelerates Between the US and EU
10. Biden Seek More Inflation: Biden Gives a Well-Delivered SOTU Speech Begging for More Inflation and Tax Hikes

Demographically, the US is better off than Japan, China, and the EU, but don’t expect rate cuts by the Fed to save the day because huge rate cuts may not come and they will not save the day if they do.

This post originated at MishTalk.Com

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