A6 OPINION Thursday 17 May 2012 Shanghai DailyWill China’s growth model onlycause consumption to decline? ❛ Investment (inEditor’s note: Michael Pettis is a Senior Associate at theCarnegie Endowment for International Peaceand a finance professor at Peking University’s China) is beingGuanghua School of Management. He published his 12 predictions for the misallocated on aChinese economy earlier this month, arguing massive scale...that China will be the last major economy toemerge from the current global crisis. — Michael Pettis Shawn Mesaros, managing director of PacificAsset Management, disagrees. Here is a ❛ The “rela-iscondensed version of their statements. tive waste” Michael Pettis: China will be the last majoreconomy to emerge from the global crisis. a lot smallerMy basic argument is that the global crisis over time sincewas caused by the necessary reversal of thegreat trade and capital imbalances of the American policypast decade, and a country can only be said has the govern-to have emerged from the crisis when thoseunderlying imbalances had been resolved. ment investing Since China’s contribution to the globalimbalances has been its excessively high in paper and insavings rate, China cannot emerge from the Illustration by Zhou Tao/Shanghai Daily China the govern-crisis until the high savings rate have been ment invests in ❛ Michael Pettis suggests the do all Keynesian-doreduced to a more reasonable level. Shawn Mesaros: Chinese companies (as real assets andexperienced a growth recession which wasan external demand problem, basically based economists) that all Chinese have to infrastructure.as a result of a depression which was is stop saving, bankrupt the household sector, and — Shawn Mesarosexported from the United States in theform of leverage and is now ongoing in wow, will that ever help the rest of the world!Europe. Fiscal stimulus of epic proportions ❛ that continu-is required everywhere else in the world That’s not just wasted spending — it’s Mesaros: The Chinese are largely becomingto avoid economic collapse. This is not the lighting fire to cash and cronyism at its best. the most productive people on the planet and The problemcase in China where consumer demand is At least in China the citizens get a bridge or as such, high-value jobs and services will isextremely strong and growing — replacing a road or a bullet train. The “relative waste” keep GDP going strong for perhaps anothermuch of the Western demand. is a lot smaller over time since American two decades before slowing appreciably ... ing the growth It remains our most amazing head-in- policy has the government investing in with clear bumps along the way.. model will lead tothe-sand moment that the world believes paper and in China the government investsthat someone else outproducing someone in real assets and infrastructure. Pettis: As some policymakers gradually a debt crisis, butelse and letting them buy things that they became aware of the problem with thewant is somehow unfair. In fact, China is Pettis: Debt is rising at an unsustainable growth model and the risk of crisis, a abandoning thethe most responsible of all the G-20 member pace a nd debt levels w i l l become fundamental split emerged between those model will leadcountries. China both invests at home and unsustainable well before the end of the who demanded rapid reform and those thatsaves its money during boom times. decade. This follows from the above point; if wanted to maintain control of resources. to much slower investment is debt funded and if it is being The problem is that continuing the growth, and es- Pettis: Chinese consumption will continue wasted, then by definition debt must be growth model will lead to a debt crisis, butto stagnate or decline as a share of GDP until increasing at an unsustainable pace — ie abandoning the model will lead to much pecially to muchthe growth model is abandoned. By “aban- faster than debt-servicing abilities. slower growth, and especially to much slower growthdoning” the model I mean that transfers Mesaros: Maybe we should talk about slower growth in the accumulation of statefrom the household sector to subsidize rapid the US$1.1trillion spending deficit that sector assets. in the accumu-growth must be eliminated and reversed. America has every single year; that the USA Mesaros: A growth model that doesn’t hap- lation of state Mesaros: Michael Pettis suggests (as do has “racked up” US$5 trillion in freshly ac- pen anywhere else in the developed world isall Keynesian-based economists) that all the cumulated credit card debt from excessive a growth model that the developed world sector assets.Chinese have to do is stop saving, bankrupt spending with effectively zero savings. would like to see come to an end. The Chinathe household sector, and wow, will that ever — Michael Pettis At least in China there’s trillions in for- model of high infrastructure investment,help the rest of the world! eign exchange reserves which China deploys higher education, production and savings as quickly as it can to buy real assets. is a winning model which marginalizes the Pettis: Investment is being misallocatedon a massive scale and this is not due to anyspecial Chinese characteristic but rather a So who’s at the debt limit? Not China. Michael Pettis wishes China would somehow become what it was 20 years ago with 500 SOLS (super-over-leveraged-sovereigns). Pettis: Chinese government debt will con- ❛ The of high in- model Chinafundamental requirement of the way the percent debt to equity and in need of a tinue to balloon through the rest of thissystem operates. Although there are still trusty IMF loan package. decade. Privatization is the best way to effect frastructure invest-some economists who disagree that invest- the transfer of wealth from the state sector ment, higher edu-ment is being massively wasted, I think this Pettis: When specific debt problems are to the private sector, and would be especiallyis so well understood by now that there is no identified, resolute attempts by Beijing efficient if privatization proceeds were used cation, produc-need to belabor the point. People respond to to resolve them are warmly welcomed by to extinguish debt. tion and savings isincentives, and for the last decade or longer analysts but are wholly irrelevant — because Mesaros: Because the Chinese are becomingthere has been a strong incentive to keep the problem of debt is systemic, not specific. so much better with a balanced economy and a winning modelinvestment levels high, regardless of their This follows from the above. savings both at government and consumer which marginalizesreturns. It would be surprising if this did not The issue is not that specific borrowers level, you have something more sustainableresult in a lot of wasted spending. may run into debt problems. It is that the in terms of growth which makes the coun- the SOLS (super- Mesaros: Any time you are racing a car run-up in debt is systemic and cannot be try more bust-proof, in which case, China is over-leveraged-and trying to tune it at the same time there prevented as long as China maintains the expected to grow the debt outstanding as ais going to be slippage. In America, they call existing growth model. If there is rapid GDP sovereign entering the global debt market- sovereigns).it US$500 toilet seats and US$250 hammers growth, say anything above 6 percent or 7 place from a very low level. So we expect rapid — Shawn Mesaros— or Enron, or some other fabulous govern- percent, debt within the system must be growth of debt from a smaller beginning.ment-supported idea like Fannie Mae. rising at an unsustainable pace. That’s more a positive than a negative.