The World Bank Proposes Tough Medicine for China
Michael Pettis | Mar 11, 2012 03:13AM ET
Contrary to some recent research reports cited in the press I do not think we have seen any substantial rebalancing of the economy towards consumption in 2011. This is largely an argument being made by economists who did not see why Chinese consumption repression was all along at the heart of the growth model. These economists are now too quick, I think, to hail evidence of a surge in consumption, but I find the evidence very weak and more importantly I am convinced that there cannot be a sustainable surge in consumption as long as the investment-driven growth model is maintained and as long as debt continues to rise unsustainably.
And as for debt, it is still rising quickly. As regular readers know I have always argued that the rise in Chinese debt, as bad as it is, was not going to lead to a banking collapse or any other sort of financial collapse because of the way local and specific debt problems would be “resolved”. Debt would simply be rolled onto the government balance sheet.
Last Monday I was in Hong Kong visiting few clients, and during my visit to Hong Kong the Financial Times gave me a nice gift – an opportunity to center my discussions – with this podcast last Thursday in which David Bloom, global head of FX strategy at HSBC, worried that if the euro keeps strengthening, it will end up “harming the region’s competitiveness.” He is right of course that if the euro strengthens, this can hurt the region’s competitiveness and so slow growth, but if this is a problem, why are European government’s still asking China and the other BRICs to contribute to their bailout? Don’t they realize yet that importing foreign capital means strengthening the euro and exporting domestic growth? The more money they take from abroad, the harder it will be to pay back any of the debt.
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